Deferred Capital Gains refer to the postponement of recognizing and paying tax on the capital gains that are accrued when a property is sold for a profit. This deferral is usually achieved through the use of specific investment strategies or tax codes.
The most common strategy used in the United States is a 1031 exchange, also known as a like-kind exchange or a Starker exchange. According to Section 1031 of the U.S. Internal Revenue Code, investors can defer capital gains taxes on any real estate used for business or investment if they reinvest the proceeds from the sale into a similar type of property within a certain time frame. This allows the investor to continue growing their investment without being diminished by capital gains tax.
Another method for deferring capital gains in the U.S. is investing in Opportunity Zones. These are economically distressed communities where new investments may be eligible for preferential tax treatment, as established by the Tax Cuts and Jobs Act of 2017. By reinvesting capital gains into these zones, investors can defer and potentially reduce their tax liabilities.
These methods of deferring capital gains aim to encourage long-term investment and economic development.