How 2019 Capital Gains May Still Be Eligible for Deferral by Year-End 2020

By Clint Edgington

In response to COVID-19, the IRS has granted extensions[1] that enable taxpayers to defer payment of their capital gains tax liability by investing capital gain proceeds into a Qualified Opportunity Fund by year-end 2020. 

In doing so, the IRS has opened the door for taxpayers to reach back to capital gains realized in 2019 and defer those proceeds by investing into a QOF prior to Dec. 31, 2020. 

Summarized Table of Eligible Dates for Deferral

Party realizing gain	Party investing/deferring Qualified Capital Gains	Earliest date of realizing Capital Gain that is still eligible	Tax Year of Returns where deferral must be indicated	Deadline to invest in QOF
Taxpayer	Taxpayer	10/4/2019	2019	12/31/2020
Passthrough Entity	Passthrough Entity	10/4/2019	2019	12/31/2020
Passthrough Entity[3]	Taxpayer	1/1/2019	2019	12/31/2020

To achieve this goal, the taxpayer must either amend their timely-filed 2019 annual return or, if the taxpayer elected for an extension, simply elect for deferral on their 2019 annual return on or before Oct. 15, 2020[2]. 

In accordance with the Opportunity Zone rules, a timely deferral into a Qualified Opportunity Fund (QOF) would not only provide deferral of a maximum 23.8% tax rate in 2019, it would also result in a 10% tax break in 2026 and a 100% tax-free gain on the tenth anniversary of the taxpayer’s QOF investment.

For a review of your specific circumstances, please contact us for a brief call.

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[1] IRS Notice 2020-39 states that “If the last day of the 180-day investment period within which a taxpayer must make an investment in a QOF in order to satisfy the 180-day investment requirement falls on or after April 1, 2020, and before December 31, 2020, the last day of that 180-day investment period is postponed to December 31, 2020. This relief is automatic.”

[2] The taxpayer must make a valid deferral election per the instructions to Form 8949, complete Form 8997 and timely file the two forms with a timely filed Federal income tax return for the taxable year in which the gain would have been recognized.

[3] Most entities will fall in this category. For various approved methodologies, see our post here.