Have capital gains?
Opportunity zones help
To defer the bill

The deadline for personal tax returns is fast approaching. By now you may be looking at a completed, but not-yet-filed, return, and staring at an uncomfortably large number on Line 37 next to the words “amount you owe.”

This can happen for a number of reasons. Retirees have social security income, possibly a pension, possibly a Required Minimum Distribution (RMD) from an Inherited IRA, possibly income from investment real estate, and RMDs from their own retirement accounts.

Capital gains can be an unwelcome visitor on a tax return as well.

A common source of capital gains is selling a concentrated position in a taxable investment account. For example, a taxpayer who made a killing in cryptocurrency might want to quit while they’re ahead. To do so, they would need to sell their position in crypto, generating a big capital gain bill, and then invest in a diversified portfolio of more traditional instruments like stocks and bonds.

Some people who own vacation homes or investment real estate reach a point in retirement where they don’t want the properties anymore. Maintenance expenses, costly projects like roof replacement, the potential of a troublesome tenant turning into a lawsuit, and the loss of casualty loss deductions are a few of the reasons why some retirees choose to get out of direct ownership of real estate. The problem, especially during a time when real estate values are unusually inflated, is that selling a property will realize a potentially large capital gain.

Whether due to selling stocks, cryptocurrency, a business, or real estate, the problem is the unwelcome addition to income forced by realizing capital gains. This extra income can bump a retiree into a new tax bracket, exposing him or her to IRMAA surcharges for Medicare Part B and D premiums, Net Investment Income Tax, and Additional Medicare Tax.

But if you are a retiree who doesn’t want to directly own real estate anymore, and have a big capital gain in your existing property, what can you do?

It turns out the tax code has some helpful provisions buried within its 70,000+ pages. One such provision was added in the Tax Cuts and Jobs Act of 2017. Qualified Opportunity Zones were created to incentivize private sector investment in economically distressed and/or undercapitalized areas of the USA.

By investing in a Qualified Opportunity Zone Fund, a taxpayer can defer his or her capital gain tax bill until 2026. This means the bill won’t have to be paid until 2027. During this time, Opportunity Zone Property or Businesses, within the fund may generate income which is paid out tax free to the investor. This tax free income stream may then be saved as a source of funds to pay the capital gain bill in 2027.

There are now roughly 8,700 Opportunity Zones in the United States. If a taxpayer has a big capital gain on their taxes, they have 180 days from April 15 to invest their capital gain into an Opportunity Zone Fund.

Even if taxes have already been filed for 2021, an amended return can show the Opportunity Zone Fund investment and deferral of capital gains.

As with any investment, there are risks to investing in Opportunity Zone Funds. Members of the Do-It-Yourself club should be particularly careful. Working with a trusted CPA will likely be critical to ensuring that tax filings follow the regulations around these investments. Many Opportunity Zone Funds have strict limits relating to investment minimums and require investors to be accredited. This is by no means as simple as buying an index ETF for an investment account.

If you have a big capital gain bill on your taxes this year, it’s not too late to do something about it. Reach out and we can help you decide if the costs and benefits of investing in a Qualified Opportunity Zone Fund align with your values and goals and, if so, guide you through the process.