Year end is typically the season for investors to engage in “tax-loss harvesting”, the practice of selling investments that have experienced a loss. By realizing, or “harvesting” that loss, investors are able to offset taxes on their investment gains.
2019 presents an interesting opportunity for investors to not only harvest their losses, but also the gains in their portfolios. For this, we have Qualified Opportunity Zones (QOZs) to thank.
Passed as part of the Tax Cuts and Jobs Act of 2017, QOZs are areas across the United States that have been designated by the U.S. government as economically depressed or underserved. To incentivize private investment in these communities, the QOZ legislation created sizeable tax breaks for investors who make certain types of long-term investments that have the potential to promote economic growth in these zones.
QOZs offer a creative alternative for investors to put their capital gains to work in a tax-advantaged way. Specifically, QOZ investments offer three core tax benefits:
- Deferral of capital gains taxes (gains tax can be deferred as late as Dec. 31, 2026).
- 15% reduction of capital gains tax if QOZ investment is held for seven years, or 10% if held for five years.
- Complete avoidance of tax on the appreciation of the QOZ investment if held for at least 10 years.
For investors who may be reluctant to sell investments or make allocation changes within their portfolios for fear of the tax impact – particularly after a 10+ year bull market – QOZs may be the answer. QOZ investments also provide investors with the ability to add non-public market, institutional-quality private investments to their portfolios, which can be very attractive.
However, timing is everything, and investors will need to act quickly if they want to make the most of the opportunity.
“The clock is very much ticking for investors who want to realize the full tax-deferral benefit of this unique opportunity,” says Matt Teich, Director of Wealth Strategy for Cresset. “To receive the full tax-deferral benefit, a QOZ investment must be held for seven years, which means investments need to be made by Dec. 31, 2019. The time to act is now.”