Accounting
Opportunity zones and other gain deferral strategies save on taxes
Stocks, real estate and alternative assets are near their all-time highs amid an election year with an uncertain tax landscape looming. Investors are calling and seeking last-minute tax mitigation strategies. For clients who have big gains from appreciated assets, I often recommend the federal opportunity zone program because it’s the most flexible and most impactful tax deferral program I’ve seen in my 40-plus year career.
As of now, the OZ program is set to begin winding down in 2026. Absent
In a nutshell, the OZ program allows investors to defer their capital gains from sales of appreciated real estate, stocks, businesses, personal residences, collectibles and even crypto through 2026. They do so by investing in one of 8,700 distressed areas of the United States via a Qualified Opportunity Fund (QOF). They just need to make their investment within 180 days of the gain reporting date. If the gain is coming through a K-1, the start of the 180-day period can be delayed until March 15 of the year following the gain date. The QOF then deploys those gains into qualifying real estate or an operating business located within one of the 8,700 designated OZ census tracts. By keeping their invested gains in place, your clients won’t pay tax on those gains until at least April of 2027. Further, if they hold the investment for 10 years, all post-reinvestment appreciation from their original QOF investment will be excluded at the federal level — and at the state level in all but six states.
Bipartisan support
The OZ program has always had bipartisan support because it’s designed to spur economic growth in underserved areas. QOFs have raised an estimated $150 billion in equity since the program began in 2018 — far surpassing the most optimistic projections. Further, bipartisan legislation is pending to push out the gain deferral period from 2026 to Dec. 31, 2028. Proposed legislation would also bring back the basis step-ups of 10% and 5% that were part of the original program, but with shorter holding periods to qualify for the step-up — five years for the 5% step up and six years for the 10% step up.
Advantages of doing business in an opportunity zone
People typically associate OZ funds with real estate development, but about 25% of our OZ work involves operating businesses located within opportunity zone census tracts throughout the U.S. For your clients that are startups or existing businesses, there are many advantages to relocating to opportunity zones, such as more affordable real estate, rental rates and operating costs to help businesses save money.
To become a Qualified Opportunity Zone Business (QOZB), a business must meet the 50% Gross Income Test. There are three “safe harbors” within the regulations and the business must meet only one of them:
- At least 50% of the services performed (based on hours) by its employees or contractors are performed within the Qualified Opportunity Zone.
- At least 50% of the compensation paid to QOZ-based employees and independent contractors is performed in the QOZ.
- The core operations and facilities responsible for generating half of the business’s gross revenue are located within a QOZ.
Our firm works with many serial entrepreneurs, including tech gurus and engineers, who sell their family businesses, rental real estate or personal real estate, and then roll the gains into a QOF where they start one or multiple businesses within the QOZ. Many entrepreneurs are using a combination of real estate entities and operating businesses in their OZ Funds.
OZ for homeowners with big gains
In today’s real estate market, many homeowners are joyfully selling their residences for substantially more than they paid for their properties years or even decades ago. But after closing, they’re surprised to receive hefty capital gains tax bills on the appreciation over their first $500,000 in basis (married) or first $250,000 in basis (single). For instance, a married couple that bought their house for $200,000 30 years ago and sells it for $1 million today would have an $800,000 gain and would have to pay capital gains tax on $300,000, after claiming the $500,000 primary residence exemption ($1 million – $200,000 – $500,000). That’s a tax bill of $45,000 to $60,000 federal alone.
If the homeowners are in good health, then reinvesting the capital gain into a QOF can offer substantial tax savings. In the above example, they still have $700,000 in cash after making the QOF investment, assuming there was no mortgage.
OZ vs. 1031 exchange
The OZ program differs from a 1031 exchange in several ways. A 1031 exchange can only be used for real estate assets, whereas with the OZ program, the gain from the sale of any type of asset — real estate, stocks, bonds, collectibles, crypto, etc. — can be placed into a QOF and receive the tax benefits. Remember, the OZ program only requires your client’s gain to be placed into the QOF (not the full market value of the investment) to defer 100% of the gain. Then the QOF or a subsidiary QOZB invests in the property. Your client cannot invest in the property directly. Example: Let’s say you had $300,000 basis on a piece of land, and you sold it for $1 million (i.e., a $700,000 gain). To get the full deferral under a 1031, you’d generally have to buy a $1 million dollar piece of property. In the OZ world, you would only have to reinvest $700,000 to eliminate 100% of your gain.
Also, under the OZ program, all the depreciation you claim, including cost segregation and everything in the interim period never gets recaptured when you dispose of it after 10 years. That ends up boosting your ROI another 2% to 3% per year. Also, your clients have time to do a ground-up build in an OZ fund using deferred tax dollars. By contrast, with a 1031 they generally can’t do a ground-up build since they must purchase real estate with an equal or higher value to defer all their 1031 gain.
Installment sales
If your clients don’t want the complexity of an OZ fund, they can simply do an installment sale. They simply sell their land with a building on it and take back a seller note for part of it. Many people overlook the fact that even if they don’t collect $1 on the note in the year of sale, they are still stuck with 100% of the recapture that they have on the depreciation they’ve previously claimed. Therefore, they must be sure to collect enough to pay the tax on the depreciation recapture. The good news is they can defer the rest of the gain until the cash is collected. Their tax basis is allocated to each tranche of collections that they receive. Also, they run the risk that capital gain rates could be higher, and that’s also a risk in the OZ world. Vice President Harris just announced plans for a 28% capital gain rate (up from 20%) for taxpayers with incomes above $1 million. We don’t know the outcome of the upcoming presidential election, so we don’t know what the 2026 tax rates are going to be. Remember, the OZ program defers the capital gain reporting — not the tax.
Delaware statutory trust
The Delaware statutory trust is another vehicle enabling investors to move or shelter their capital gains. DSTs are essentially pre-packaged 1031s that allow multiple investors to pool their money and invest in actual real estate properties (not funds) without the headache of managing the properties, which are often institutional-grade assets such as apartment buildings, office buildings and shopping centers. This collaboration allows your clients to diversify their portfolios and potentially earn higher after-tax returns on their investments.
Regardless of which party wins the White House in November, tax rates are likely to be worrisome for many of your successful clients. It will become more concerning for them in a few years when the multi-trillion-dollar U.S. debt load can no longer be ignored. If your client has gains of $1 million or more from any type of appreciated asset, the OZ program — or one of the other tactics explained above — should be on your short-list of strategies for them to consider. Doing good for others while doing well for your clients and their families. That’s a win-win all around — exactly the intention of the bipartisan drafters of the OZ program.
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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