Donating Appreciated Securities & Revisiting Opportunity Zones

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Donating Appreciated Securities

As December 31 grows close, the time to make tax planning moves that can still benefit 2019 is short. A great way, especially after this year's bull market, is to donate appreciated securities and mutual funds owned for at least one year to charity. This provides a double tax benefit - the full fair market value of the asset is deducted as a charitable contribution, and the capital gain is never taxed. A convenient way to contribute these securities is through a donor-advised fund, as we discussed in a previous Tax Alert.

 

Opportunity Zones Revisited

An important benefit added to the income tax code in the Tax Cuts and Jobs Act was the Opportunity Zone program, first available in tax year 2018. Many prior LMC Tax Cuts and Jobs Act Alerts have addressed the complex provisions of this new law:

 

 

Earlier this month LMC Tax Director William Minoff was among presenters at an Opportunity Zone program cosponsored by LM Cohen & Company at the Harmonie Club in midtown. Produced by The Riverside Experience, the program discussed "The Opportunity (Zone) of Single-Family Homes." Readers may view the entire program here (it's about 2½ hours). Bill's presentation starts at about 1:42.

 

As trusted tax professionals, we field many Opportunity Zone questions from our clients and friends. One client recently emailed our Managing Partner Lee M. Cohen:

 

I was offered to participate in a real estate investment deal consisting of an Opportunity Zone in NJ. They are telling me that money invested in the deal will be tax-free. In addition, if we hold the property for 10 years, all profits are tax-free as well. Is this correct?

 

Lee responded by telling the client that the money he'd invest in the deal would not be tax-free - rather it is tax-deferred. If he invests a taxable capital gain (earned from another transaction that he sold) into an Opportunity Fund within 180 days of the sale, he won't have to report the capital gain on his tax return that year. So long as he still owns the Opportunity Fund, he will not report the gain until tax year 2026. He must still pay the tax on that gain eventually - that's what makes it tax-deferred, not tax-free.

 

Notably, the client does not have to invest the entire proceeds of the sale in the fund to defer the gain - just the capital gain portion. For example, if he sold an asset for $100,000 proceeds that cost him $40,000 to buy, he'd have a $60,000 capital gain. He must invest only $60,000 (not the whole $100,000 proceeds) in an Opportunity Fund to defer the entire capital gain until 2026. If he were to sell the fund before 2026, the original capital gain would become taxable in the year that he sells the fund.

 

If he holds the Opportunity Fund for either 5 or 7 years, he actually will get a partially "tax-free" portion - after 5 years he can exclude 10% of the original gain, and after 7 years 15%. For example, if he holds that $60,000 gain in an Opportunity Fund for 5 years he'd only have to report a taxable gain of $54,000. The maximum 15% exclusion benefit is expiring soon - he'd have to invest the gain in an Opportunity Fund by December 31, 2019 to be able to hold it for 7 years by December 31, 2026.

 

Regarding whether profits are truly tax-free if he holds the fund for 10 years, that is indeed correct. But it is important to remember that he still will pay the deferred tax on the capital gain that he originally invested. The exclusion applies to appreciation that grows within the Opportunity Fund. That gain will not be subject to capital gains tax once he owns the fund for 10 years (but if the fund suffers a loss, he can claim the capital loss on his return).

 

Contact your LM Cohen professional if you too have questions about Opportunity Zones or want to learn more about donating appreciated securities. All our prior Tax Cuts and Jobs Act Alerts are available on the Updates page of our website.

 

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