1031 exchange is perhaps the best option when selling a real estate property with a gain. However, if a property owner misses a 1031 exchange deadline, there is another alternative to help you defer the capital gains taxes. You can reinvest your sales proceeds in a Qualified Opportunity Fund, which is a tax-saving vehicle encouraging investors to invest in economically distressed areas. QOFs are not only a tax-saving vehicle for 1031 exchange but also for anyone who is selling their assets and realizing their capital gains. An investor can defer their capital gain taxes if they roll over the profits from the sale of a relinquished property into a QOF.
Why Invest In Qualified Opportunity Zones?
Tax liability reduction by 15% : When you reinvest your sales proceeds in a QOF, you can defer the capital gains until December, 2026. After this time period, you will owe only 85% of the tax on the original sales proceeds; 15% will be forgiven.
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Tax elimination on capital gains : Once you have reinvested in a QOF and deferred the capital gains taxes on your sales proceeds, the money you invested will go into a real estate development project in that particular Qualified Opportunity Zone. If you hold your investment for at least 10 years, any capital gain upon the sale will be tax-free.
How Does It Work?
Passed in 2017, the Tax Cuts and Jobs Act allowed states to designate specific economically-distressed communities that needed economic development as Qualified Opportunity Zones. A taxpayer can defer taxes on unrealized capital gains by investing in a QOZ. The investment will, then, be invested in a real estate located in that QOZ. To qualify, the investor must roll over the gain from the sale into a QAF within 180 days of selling the relinquished property. The QOF can, then, use this investment to purchase real estate properties in the Qualified Opportunity Zone.
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