Tax Relief for (Big) Capital Gains

Just when it looked like Congress needed something to do while the government was shut down, they found the time to put some closure on the Tax Reform provision designed to allow significant deferral of Capital Gains.

Capital Gains are generally taxed in the year that they arise, for federal purposes, at rates generally lower than paid on the rest of taxable income. But, the recently enacted Tax Cuts and Jobs Act will allow taxpayers to defer Capital Gains recognized on or after January 1, 2018, generally to the end of the year 2026 (or later) before being taxed. Such deferred gains will not be reduced by any otherwise offsetting capital losses. The investment will have a zero basis. Other major provisions of the statute include:

Capital Gains which are to be deferred must be invested in “Opportunity Zone Funds”, which are funds designed to be invested in specially designated geographic areas. Capital Gains must be invested in such funds within 180 days of the date of sale of the underlying assets.

If the investments mentioned above are held for five years or longer, then the basis for those funds will be increased by 10%. If held for seven years or longer then the basis for those funds will be increased by 15%. If held for ten years or longer, then the lessor of the deferred gain less any increases in basis, or the fair market value of the investment less any increase in basis will be taxable.

There are various other provisions of the law, including those regarding recapture, installment sales, sales by pass-through entities, sale by beneficiaries, gain on sales of personal residences, and mixed sale of qualifying and non-qualifying assets. The writer of this post will be glad to discuss any of the matters mentioned.

Don’t miss important filing deadlines. Contact Masler & Associates Inc. today!

– Steve Masler, CPA