How to take advantage of a new tax break, and pay nothing in capital gains
The Tax Cuts and Jobs Act has created a new tax break that dangles the potential of a 0% capital-gains tax on certain investments in economically distressed areas. But you’ll need to wait 10 years to claim it.
How do I get this tax break? A taxpayer sells an existing investment such as stocks, yielding a capital gain. Special rules apply to the sale of real estate used in a trade or business. The taxpayer then has 180 days to invest part or all the capital gain into a QOZ fund and fill out IRS Form 8949. There is no requirement to invest all the proceeds from the sale; a person could invest only the capital gains. Those capital gains are deferred and are reduced with time.
If you are considering moving your business to a QOZ to claim the tax breaks, consult your legal and tax advisers.The first is that taxpayer defers the capital-gains tax that would have been incurred from the sale of the initial investment until the stake in the QOZ fund is sold or Dec. 31, 2026, whichever comes first.
Example: Taxpayer A invested $100,000 in Investment X in 2016 and liquidated the investment for $300,000 on Aug. 15, 2018, generating a capital gain of $200,000 If this taxpayer invests the entire $300,000 into the QOZ fund on Oct. 1, 2018, she does not pay any capital-gains tax on the $200,000 of capital gains.
If Taxpayer A keeps the investment past Dec. 31, 2026, capital-gains taxes are still owed on the deferred gains, in this case on $170,000 .
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