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The first day of the day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain. I am a partner in a partnership and the partnership sold assets generating capital gains on July 1, The partnership did not make an election to defer the eligible gain.
When does my day investment period begin? Does it matter that on May 1, , I received a K-1 notifying me of the gain? The date on which you receive a K-1 notifying you of the eligible gain is not relevant. I am a calendar year taxpayer. When does my day investment period start for my capital gain dividend? For RIC or REIT capital gain dividends, you can choose for the day period with respect to eligible gain to begin either on the last day of your taxable year in which you would otherwise recognize the capital gain dividend December 31, or on the date of the dividend distribution, December 10, Basis Questions Q I made an investment in a QOF.
After holding it for at least 10 years, I sell or exchange it. Can I adjust the basis in the QOF interest to its fair market value? Yes, but only to the extent you made a proper deferral election with respect to your investment that is, only to the extent that your investment in the QOF is a qualifying investment. In connection with a proper deferral election, I made an investment in a QOF partnership.
The QOF subsequently invested cash in another partnership partnership A. After I held my investment in the QOF for 10 years, partnership A sold a building to an unrelated party for a gain. That gain is part of my distributive share with respect to the QOF and is reported to me on a K—1. May I exclude this gain? In addition to the basis increase rules for sales of qualifying QOF interests held for at least 10 years, the holder of a qualifying investment with respect to that investment may elect to exclude all gains and losses generated from the sales of assets by that QOF or certain lower-tier partnerships owned by the QOF.
This is permitted, however, only if all of the following requirements are satisfied: First, it only applies to that portion of the investment that was a qualifying investment in a QOF partnership or QOF S corporation that the taxpayer held for at least 10 years. Second, there was an election made to exclude all the gains and losses from the sales that are attributable to the qualifying investment on a timely filed federal income tax return.
This election to exclude gains and losses may be made for each year during which there are asset sales by the QOF or certain lower-tier partnerships. Third, the gain from that sale was not derived from the sale of inventory in the ordinary course of a trade or business. Fourth, the QOF must distribute or be treated as making a distribution of the net proceeds from the sales within certain time periods.
I deferred an eligible gain by investing in a QOF partnership. Thus, my partnership interest in the QOF is a qualifying investment. Do I recognize any gain under the QOZ rules due to the merger? No, provided that you only received a qualifying investment in the new partnership as a result of the merger.
There may be gain recognition under the QOZ rules if you received other property as part of the merger. I deferred an eligible gain by investing in a QOF partnership and received a qualifying investment. Another partnership in which I am a controlling partner received a profits interest in exchange for services to the same QOF partnership. How does the profits interest affect my qualifying investment?
A profits interest received in exchange for services is not a qualifying investment in a QOF. If the profits interest is held in a separate partnership, even one that is controlled by you, it will not affect your separate qualifying investment. I had ordinary gain from the sale of property in During the day period beginning on the date of the sale, I invested the amount of that gain in a QOF. In , I sell my interest in the QOF. Can I adjust my basis to fair market value?
Ordinary gain is not eligible for deferral. This type of investment is called a non-qualifying investment. It is a mixed-funds investment if the taxpayer directly holds both a non-qualifying investment and a qualifying investment in the same QOF. Inclusion of Deferred Gain Q I deferred an eligible gain by investing in a QOF. What ends the deferral? An investor must include the remaining deferred gain on the earlier of an inclusion event or December 31, The amount of deferred gain included in income depends on i the fair market value of your qualifying investment in the QOF on the date of the inclusion event and ii adjustments to the tax basis of that qualifying investment.
What is an inclusion event? An inclusion event, in general, is an event that reduces or terminates your qualifying investment in a QOF. What happens to my deferred gain? When the QOF liquidated, the deferral period ended. You must include the deferred gain in the taxable year during which your QOF liquidated. When you file your federal income tax return for that year, you must report the gain on Form and must reflect the change to your QOF investment on the Form See instructions for Forms and I elected to defer eligible gain after I made a qualifying investment in a QOF and, before December 31, , I gave the qualifying investment to my child.
Is there anything that I need to do? Giving away your qualifying investment in the QOF is an inclusion event, which ends the deferral period. It's often wise to leave as much as you can in your retirement accounts as long as you can, so those investments can continue to grow on a tax-free or tax-deferred basis.
As long as you're working, you generally don't need to take required minimum distributions RMDs from your non-Roth qualified retirement plan accounts, such as a k. Footnote 1 If your retirement plan account is an IRA, you must begin taking RMDs by the required age, regardless of whether you are still employed. Tax-efficient investing shouldn't supersede your existing investment strategy, but it is important to consider with your tax advisor when you're making investment decisions.
Choose tax-efficient investments Specific investments can carry tax benefits, as well. For instance, income earned from municipal bonds is generally income tax-free at the federal level and, in some cases, at the state and local levels, too. Be aware that tax-exempt bond income is usually tax-exempt when it's held directly, but when it's distributed from a retirement account — unless it is a qualified distribution from a Roth account, generally — it's treated as ordinary income and is taxable.
Other tax-aware investments may include tax-managed mutual funds, whose managers work deliberately and actively for tax efficiency, as well as index funds and exchange-traded funds that passively track long-term investments in a target index. It's important to check with your tax advisor to make sure you understand the tax features of these investments and to determine whether muni bonds, which often have a lower yield than other bond options, may be an appropriate choice for your non-retirement account portfolio.
Match investments with the right account type It's important to make sure you're taking full advantage of tax-efficient investments by holding them in accounts with the most advantageous tax treatment. Investing in this way can help ensure that you're realizing all potential tax benefits without increasing your tax liability. Investments that regularly generate taxable income, such as taxable bonds or stock funds with high turnover, may be better held in tax-deferred accounts — traditional IRAs, for instance — to gain the best potential tax benefit.
Note that withdrawals you take during retirement may be taxed at your ordinary income rate, which may be lower at that time — or potentially not taxed at all, in the case of a Roth account. Tax-neutral investments, such as tax-managed mutual funds and municipal bonds, are generally better suited for a non-tax-deferred account, like a taxable brokerage account. If your investments don't generate high taxes, there is less of a need to defer them, so there is little reason to put them in an account that could restrict your access to them.
Just be sure that the decisions you make about where to hold various investments are consistent with your overall financial strategy. Hold investments longer to avoid unnecessary capital gains It is rarely worth holding on to a stock you are ready to sell simply to avoid taxes — with one exception. As a result, it may make sense to delay selling appreciated stocks until they qualify for long-term capital gains treatment. Again, always check with your tax advisors. Harvest losses to offset gains Using any investment losses you may have to offset your investment gains each year — a technique called "tax loss harvesting" — can help reduce your federal income tax liability.
For higher earning investors, a higher long-term capital gains tax rate plus a potential additional net investment income tax of 3. Bear in mind that if you wait until late in the year to sell, you'll be dependent on what happens in the markets in the year's final weeks.
And if you buy substantially identical stocks within 30 days before or after the sale, it will be considered a "wash sale," and you may not be allowed to subtract those losses from your gains for that taxable year. Consult your tax advisor to ensure that the wash sale rules won't prevent you from using this strategy. Whatever strategies you use, remember that tax-efficiency isn't the only consideration for your investment decisions.
You also need to think about how each investment can help you pursue your diversification, liquidity and overall investment goals — at a level of risk you are comfortable with. Tax efficiency then becomes another way to help you choose among your investment options. Be sure to consult with your professional tax advisor before making decisions that will affect your taxes. With each of the strategies described above, you should consider the impact of state and local taxes, in addition to the impact of federal taxes.
You may defer your first RMD until April 1 in the year after you turn age 72, but then you'd be required to take two distributions in that year. Consult your tax advisor for more information on your personal circumstances. Investing involves risk.
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