A frequent question that we get upon a large capital gain event (think business exit) is “What can I do to minimize my taxes from this sale?” 

The answer used to be, “Not much.” There might be a little bit you could do here or there or, if you were lucky, the transaction might qualify for a like-kind-exchange.

Tax reform has since done away with like-kind-exchanges for anything but real estate.  However, tax reform did add an attractive new option – Qualifying Opportunity Funds (QOF).  Individuals and entities qualify to use QOF.

Qualifying Opportunity Funds are a partnership or corporation organized for the purpose of investing in a Qualified Opportunity Zone. Qualified Opportunity Zones are determined by census track; they are generally going to be economically depressed areas. Qualifying Opportunity Funds allow a taxpayer to defer capital gains until Dec.31, 2026 (earlier if investment in opportunity fund is sold earlier).

Unlike like-kind-exchanges, you don’t have to reinvest the entire sales price, but only the capital gain portion of the sale. If the Qualifying Opportunity Fund investment is held for at least five years, 10 percent of the gain is permanently untaxed. If held at least seven years, the total comes to 15 percent of the gain for permanent exclusion.

Here are some rules to consider with the Qualifying Opportunity Fund tax deferral:

• The reinvestment of capital gains must be done within 180 days of the sale that triggered capital gains. With capital gains triggered within a pass-through business entity, you can also elect to invest within 180 days within the end of the tax year of the entity.
• The Qualifying Opportunity Fund must invest 90 percent of its assets in a qualified opportunity zone property.
• You need to make sure the entity you are investing in qualifies as a Qualified Opportunity Fund before investing.
• The property invested in must have not been used in the Qualified Opportunity Zone before.