Getting More of Your Clients’ Portfolios Positioned for Tax-Free Growth
Tax-free compound growth is a powerful way to build long-term wealth. The U.S. Treasury uses this incentive to encourage investing in vehicles like Qualified Opportunity Zone Funds (QOFs). Because the Treasury is giving up significant revenues, it puts parameters around how much can be invested. QOF eligibility is restricted to the amount of capital gains realized in the last 180 days, although there are no maximum dollar amounts or income restrictions.
If you are an investor eager to tap into the tax advantages of a Qualified Opportunity Fund, now may be the ideal time to explore your options. You may have cash ready to invest, but there’s a catch: if you have not realized any capital gains in the last 180 days, then your cash isn’t currently eligible for QOF tax benefits. Don’t worry—there’s a straightforward strategy to make your cash QOF-eligible by triggering a capital gain. Here’s how you can do it.
Making Cash QOF Eligible
To claim QOF tax benefits, you must invest an amount equal to or less than a capital gain you’ve realized within the past 180 days. Unlike 1031 exchanges, QOF rules don’t require you to reinvest the specific cash received from the original sale—only an equivalent amount of capital gain. This greatly simplifies QOF transactions compared to 1031s because there is no need to segregate sale proceeds. The absence of a “cash tracing” requirement means you can use any cash you have, as long as it’s paired with a recent gain. So, if you’re sitting on cash but lack an eligible capital gain, you can create one strategically.
The Solution: Trigger a Capital Gain
You can make your cash position QOF-eligible by intentionally realizing a capital gain in your portfolio. Here’s a step-by-step approach:
- Choose the Investment Amount: For example, you have $200,000 in cash that you want to position for tax-free long-term growth by making it QOF eligible.
- Identify an Unrealized Capital Gain: Select a stock or other asset in your portfolio with liquidity and an unrealized capital gain liability.
- Trigger a Capital Gain by Selling the Asset: For example, if you sell $500,000 worth of stock with a $300,000 cost basis, you realize a $200,000 capital gain.
- Repurchase the Asset Immediately: Buy back the same stock right after selling it. This resets your cost basis to the current market value ($700,000 in this example), eliminating the unrealized gain liability from that position. There is no wash sale rule for triggering capital gains—only losses.
- Invest in a QOF: Within 180 days of the sale, invest up to the amount of the capital gain (for example, $200,000) into a QOF using your existing cash. Your cash is now eligible for QOF tax benefits.
Why This Strategy Works
This approach is effective for several reasons:
- No Cash Tracing Required: QOF rules allow you to invest any eligible cash, not just the proceeds directly received from the sale. This flexibility is a key advantage over 1031 exchanges.
- Wash Sale Rules Don’t Apply: Wash sale rules only apply to harvesting tax losses, not gains. Selling and repurchasing an asset to realize a gain is perfectly allowable and will not trigger these rules.
- Portfolio Optimization: Resetting the cost basis of your asset eliminates unrealized capital gain liability, which can simplify your tax planning and reduce future tax exposure.
Things to Keep in Mind
Before executing this strategy, consider the following:
- Work with a Financial Professional: Tax rules can be nuanced, and your specific situation may require tailored advice. A tax professional can ensure compliance and optimize your approach.
- Act Within 180 Days: The clock starts ticking the moment you realize the capital gain. You must invest in a QOF within 180 days to qualify for tax benefits.
- Monitor Market Risks: Repurchasing an asset right after selling assumes minimal price changes during the transaction. Be mindful of market volatility to avoid unexpected costs.
- Transaction Costs: Account for any brokerage fees or taxes triggered by the sale, as these could slightly reduce the net benefit.
Conclusion
If you’re an investor seeking more tax-free opportunities and have cash available but no recent capital gains, you can still access the tax benefits of a QOF. By strategically selling an appreciated asset to trigger a gain, you make your cash QOF-eligible while potentially reducing your portfolio’s tax liabilities. With no cash tracing or wash sale hurdles to worry about, this approach is a powerful tool for savvy investors. Consult a tax professional to ensure this strategy fits your financial plan, and start exploring QOF opportunities today.
Park View OZ REIT: The Streamlined Approach to QOF Investing
Unique Public Access: Park View OZ REIT is the only Qualified Opportunity Fund with publicly traded shares (trading symbol: PVOZ).
Flexible Entry Options: Begin with as little as one share on the open market or $10,000 through our subscription agreement.
Investment Timeline Freedom: Exit at your discretion without penalty. With no planned 10-year liquidation, maximize potential tax-free growth through 2047.
Simplified Tax Reporting: Avoid the complexity and delays of partnership K-1 tax forms.
Open to All Investors: No accreditation requirements to participate.
Convenient Purchasing Methods: Buy shares through your existing brokerage account or directly via our website’s electronic subscription agreement.
Are you ready to see how QOFs can benefit you?
Materials provided by Park View OZ REIT or our affiliates have been prepared for informational purposes only and are not intended to provide or be relied on for tax, legal, or financial advice. You should consult your own tax and legal advisors before engaging in any transaction.