How Investors Can Defer and Reduce 2018 K-1 Capital Gains Earned from Partnerships
By now investors have likely heard of Opportunity Zones, the economic development program offered through the Tax Cuts and Job Acts of 2017. But a large number of investors are unaware of the special flexibility afforded to those who have earned capital gains through a partnership. In fact, several of Cadre’s investors didn’t realize they had eligible capital gains to deploy until exploring this specific angle in more detail with us.
Last October, King & Spalding outlined this opportunity in a memo on the Proposed Regulations:
In the case of a partnership…the 180-day period begins on the last day of the partnership’s taxable year, as that is the day on which the partner would be required to recognize the capital gain if it were not deferred.1
In other words, the 180-day clock for redeployment still applies, but when the gain is generated through a partnership, there is more flexibility on when that 180-day period begins.
(Learn more in Cadre’s Guide to Opportunity Zones.)
While it might seem like a nuanced technicality, this provision actually applies to a large number of investors, many of whom are in the midst of receiving 2018 Schedule K-1s for the partnerships they are invested in. For these investors who are now receiving a clearer picture of their 2018 tax situation, Opportunity Zones present an attractive conduit for potentially deferring and reducing capital gains tax liabilities.
Consider the following hypothetical example:
Christine is invested in a private equity fund that sold a portfolio company and made a large distribution at the end of January 2018. That distribution is now classified as a capital gain on Christine’s Schedule K-1 from the private equity fund. Applying the standard 180-day rule, Christine’s 180-day window would have expired in July 2018. However, given the gain was generated through a partnership, she can choose to start her 180-day clock at the end of the partnership’s taxable year. This election would give Christine until June 29th, 2019 to re-invest her capital gain.
Investors who reinvest capital gains through a Qualified Opportunity Fund can capture significant tax benefits. Opportunity Zones offer the potential for capital gains tax breaks on any recently sold investment — including stocks, bonds, a private business, or real estate — so long as the gains are rolled into a Qualified Opportunity Fund (“QOF”) within 180 days of the gains being realized.