How To Save On Long-Term & Short-Term Capital Gains Tax

Qualified Opportunity Zones (QOZ), which were introduced as part of the 2017 Tax Cuts and Jobs Act, were created to incentivize developers to build and create jobs in economically distressed and low-income communities. And this program, in which Opportunity Zones and capital gains essentially work together, is one of the most powerful tax break opportunities most investors will ever come across because it makes it possible to save on both short-term and long-term capital gains tax.

Investing in Qualified Opportunity Zones automatically makes you eligible for preferential tax treatment through both deferral and forgiveness. Here’s how it works:

If you incurred any capital gains this year from stocks, art, trading, real estate, or any other source, then you can avoid having to pay tax on those capital gains simply by investing the funds in a Qualified Opportunity Fund (QOF). What makes this such a fantastic opportunity is that all capital gains qualify for these tax benefits offered by investing in QOZ funds. In fact, the only thing that can impact your benefits is timing.

Qualified Opportunity Fund Investment Timeline

In general, investing capital gains in a Qualified Opportunity Fund is straightforward, but the timeline for doing so can add some complexities to the process. For instance, the law requires that capital gains must be invested in a QOF within six months of being recognized. But this can lend some confusion because how capital gains are recognized all depends on the source of the gains.

For example, if your capital gains are from a partnership, then the gains can be recognized either at the time of the gain or at the end of the partnership’s tax year. So, if you had partnership gains this year, then you have until the end of your partnership’s tax year to invest those gains into a QOF to take advantage of the Qualified Opportunity Zone tax break.

But if your capital gain comes from the sale of stock or a business, then the date of sale is the official start date from which the six-month clock starts ticking. In this example, if you sell your stock shares or your business on May 24, 2024 and you accrued capital gains, then you have until November 23, 2024 to invest the funds to qualify for the QOZ tax benefit.

How QOF Tax Benefits Work

Investing short- or long-term capital gains in a QOF allows investors to receive a full deferral on their capital gains. You don’t even need to net eligible gains against losses on your individual tax return. For example, if one of your investments made $200,000 and another investment lost $200,000, then you can elect to invest the $200,000 gain and take a $200,000 loss on your taxes this year. And depending on the year in which the original investments were made, you might only be obligated to pay 85% of your tax liability.

What Type of Investor is Best Suited for Investing in QOFs?

Any investor can enjoy the tax benefits that come with investing in Qualified Opportunity Funds, but arguably it is the investor who has the ability to harvest their gains at any time who stands to be in the best position to take advantage of this remarkable tax incentive. The reason is because being able to harvest gains at any time takes the complicated element of timing off the table.

The most important thing you will want to remember is that the only money that will be eligible for the tax shield is the money that you are investing in the QOF. Understandably, the ins and outs of learning how to save on long- and short-term capital gains tax by investing in a Qualified Opportunity Zone Fund can be confusing, but that’s why The Pearl Funds is here to help.

At The Pearl Funds, we’re a boutique, early stage investment fund that uses two separate tax incentive programs, the Opportunity Zone (OZ) program and the Qualified Small Business Stock incentive (QSBS), and we can help you yield tax-free returns in as little as 5 years. We are ranked in the top 1% of all OZ investment funds in the country by Forbes, and as the nation’s first and the best known OZ VC investment fund, we’re the industry leader in Opportunity Zone investing. To learn more about how to save on your capital gains tax with Qualified Opportunity Zone investments, contact us today.