If you are an investor and have some reinvestment plans, then you need to be aware of the best tax-saving opportunities to maximize your gains.
Most of the investors make use of IRS’s 1031 exchange code when they plan to dilute their existing assets and reinvest the proceeds in some other similar real estate. This is mainly because it allows them to avoid payment of capital gains taxes on the proceeds received from the sale of an investment property. 1031 exchange entails that such proceeds need to be directed for reinvestment in some other property of the same or higher value within a given time frame to get this tax benefit.
Qualified intermediaries play a significant role in case of a 1031 exchange. Let’s take a deeper look.
- As per section 1031, proceeds received from the sale of a property are taxable
- Qualified intermediaries are persons or companies who agree to facilitate the 1031 exchange. They do so by holding the sale proceeds until they are transferrable to the owner of the replacement property (Owner of property reinvested in).
- To avoid paying capital gains taxes, such sale proceeds are directly transferred to qualified intermediaries who further transfer such amount to the replacement property owner.
1031 exchange is a good option to get good tax breaks on the sale of properties. But there is an even better option which not only can give tax exemptions on capital gains taxes but many other benefits to maximize your gains.
The updates in the Tax Cuts and Jobs Act brings you a multi-dimensional tax-saving investment program. The program gives you preferential tax treatment for investing or reinvesting the proceeds of the sale of the property to economically weaker zones known as Opportunity Zones. Such zones are present throughout the 50 states, the District of Columbia, and all the five U.S. territories.
To become eligible for the preferential tax treatment under this tax reform, you need to reinvest the capital gains earned by you on sale of a property in a qualified opportunity fund. Such funds could be a partnership, corporation, or a limited liability company that is formed to reinvest in a Qualified Opportunity Fund in an Opportunity Zone.
Let’s look at the three tax benefits that await you on investing in a Qualified Opportunity Zone: –
- You can receive a temporary deferral of taxes on previously earned capital gains that are reinvested in an Opportunity Zone. You would be eligible for this tax benefit until you sell or exchange the property based on the Opportunity Zone or 31st December 2026, whichever is earlier.
- Reduction of capital gains tax liability of the original value of Qualified Opportunity Fund by 10% if you hold it for at least five years and 15% if you keep it for at least seven years.
- If you hold the investment for at least 10 years, you can avoid paying capital gains taxes on the appreciated value of this investment. This is done by increasing the adjusted basis of the qualified opportunity fund investment and equalizing its fair market value on the date on which this investment is sold or exchanged.
So make the most of this tax reform in the Tax Cuts and Jobs Act by reinvesting your capital gains in a qualified opportunity fund within 180 days of realization of such a gain.
This alternative to 1031 exchange is not only more beneficial but also cost-saving because we are all already aware of the high rates of properties across the U.S. Investing in an Opportunity Zone will not only improve the conditions in such economically weaker sections of the country but will also enable you to make higher savings on your taxes.
So what are you waiting for? Read our article on “Why you should invest in a Tax Opportunity Zone Fund” to begin your search for a suitable zone for investment.
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