It is widely understood that you can defer taxation of the gain on a sale of investment real estate if the sale proceeds are reinvested into new investment real estate within 180 days. This timing can be challenging to meet.

Well-known strategies for mitigating this timing challenge, including conducting a reverse exchange or investing in a TIC interest with a sponsor. Another alternative that people are less familiar with is the Delaware Statutory Trust (DST). A DST is a trust managed by a trustee that holds one or more properties for the benefit of investor beneficiaries. The IRS ruled in 2004 that the purchase of a beneficial interest in a DST holding real estate can qualify as “replacement property” for purposes of Section 1031. While there are a couple drawbacks to a DST (lack of control and liquidity), they also have lower deal costs, lower investment minimums, asset diversification and easier administration and as a result have largely supplanted TICs as the prepackaged rollover option of choice. In addition, there are numerous sponsors that offer investments in DSTs to meet the reinvestment requirements for Section 1031.

Bottom Line: Investing in a DST can facilitate a selling investor’s ability to comply with the timing requirement of a like-kind exchange as well as provide diversification and professional management.

“You didn’t come this far only to come this far. – Tom Brady

We frequently deal with companies that would like to issue profits interest retroactively. The typical scenario is that the company intended to or agreed to issue profits interests to a service provider and for one reason or another the paperwork was never done and the profits interest was never issued. As a result, the service provider misses out on the appreciation in the value of the company that occurred during the intervening two or three (or however many) years.

While it is not possible to go back in time to grant that interest, a grant of a “catch-up profits interest“ is the next best thing. A catch-up profits interest provides for a priority distribution of profits to the service provider to catch them up for the missed appreciation.

For example, assume a service provider was supposed to receive a 1% profits interest three years ago and that if it had been issued at that time, the profits interest would be worth $300,000 currently. A catch-up profits interest could be issued which would provide that the first $300,000 of partnership profits (on a sale for example) would be distributed to the service provider and the remainder of the profits would be divided up in accordance with the partners’ percentage interests. (Technically, to receive a full 1% interest, the catch-up distribution would have to be $303,030 rather than $300,000.)

Assuming there is $300,000 of profit at the time of sale, the service provider is put in as a good a position as he or she would have been if the profits interest had been issued timely.

Bottom Line: While not perfect, a catch-up profits interest can be an effective way to deal with common scenario of the failure to issue an agreed-upon profits interest in a prior year.

If at first you don’t succeed, remove all evidence you ever tried. – David Brent

Section 83(b) allows taxpayers to elect to include in their current taxable income certain compensation that would not otherwise be taxable until a future year. For example, a taxpayer that receives restricted stock compensation that would be taxable in future years as it vests often will make a Section 83(b) election to be taxed on the full value in the year the stock is awarded in order to be taxed on a lower value. Section 83(b) elections are also commonly made with respect to the grant of profits interests.

Historically, there was no form provided by the IRS for making a Section 83(b) election. In 2024, the IRS created Form 15620 that could be used to file a Section 83(b)election. If the form was used, taxpayers needed to print and complete the form and file it by mail. Effective in 2025, Form 15620 can be filed electronically through the IRS‘s website.

Taxpayers are not required to use Form 15620 to make a Section 83(b) election nor are they required to file it electronically. However, if a taxpayer wants to file electronically, they must use the form.

Bottom Line: Taxpayers now have options for filing a Section 83(b) election. Given the 30-day time limit on making the election, filing electronically may help avoid missing the deadline.

“The older I get, the better I used to be.”
– Lee Trevino

The One Big Beautiful Bill Act (OBBBA), which made the Opportunity Zone program permanent also established detailed reporting obligations for Qualified Opportunity Funds (QOFs). It also imposes reporting requirements on the Qualified Opportunity Zone Businesses (QOZBs) owned by the QOFs.

Since their creation in 2017, Opportunity Zones have offered major tax benefits to investors who reinvest otherwise taxable gains into low-income areas designated as Qualified Opportunity Zones. Concerns have been voiced in the interim about the lack data to show whether these investments were truly creating jobs, housing, or economic growth as intended. Critics also worried about misuse—funds could claim tax breaks without fully meeting the requirements.

Beginning with tax years after July 4, 2025, every QOF (existing or new) must file an annual return with the IRS that includes:
• The fund’s identity and structure (corporation or partnership).
• The value of its assets, and the portion of value of those assets that consist of Qualified Opportunity Zone property.
• Details for each QOZB in which it invests including the identity of the QOZB, the amount of the investment in the QOZB, the census tract location, whether property is owned or leased and the value of that property, NAICS business codes, and employment counts.
• The number of residential units owned or leased.
• The identity of anyone that disposes of investments during the year, including acquisition and sale dates.

The QOF must furnish a written statement to an investor who disposes of their interest during the year with the information about the disposition.

Similarly, QOZBs must provide the info to the QOFs that own equity in the QOZB so that the QOF can make its reports.

These rules are backed by strict penalties. Missing or incomplete reports may trigger penalties of $500 day, capped at $10,000 for smaller funds and up to $50,000 for large funds. Willful disregard raises penalties dramatically—$2,500/day up to $250,000.

Bottom Line: Funds and investors now need robust systems to track data and ensure compliance—or risk steep financial consequences.

“Be happy – it drives people crazy.” – Unknown

The One Big Beautiful Bill Act introduced a powerful new tax benefit for the manufacturing and production industries. Under Internal Revenue Code Section 168(n), businesses can immediately expense 100% of the cost of Qualified Production Property (QPP)—even when it’s real property that would normally depreciate over decades.

To qualify as QPP, the property must be:

  • nonresidential real property
  • used as an integral part of a qualified production activity—i.e., facilities directly involved in manufacturing, production, refining, agricultural, or chemical production
  • QPP does not include the portion of the property used for offices, admin services, parking, sales, research, software development, or engineering.
  • property whose original use begins with the taxpayer,
  • constructed between January 20, 2025 and December 31, 2028, and placed in service by December 31, 2030
  • the taxpayer elects to treat it as QPP

Used property can also qualify if (i) it is acquired between January 20, 2025 and December 31, 2028, (ii) has never been used in production by anyone between Jan 1, 2021 and May 12, 2025, (iii) it is has not been used by the taxpayer before acquisition and (iv) it is acquired from an unrelated party.

Note that the entire benefit will be recaptured if the property ceases to be used in a qualified production activity within 10 years after being placed in service.

Bottom Line: There is now a huge tax incentive for newly constructed or acquired manufacturing and production facilities provided they are operated as such for 10 years. Taxpayers may wish to conduct a cost-segregation study to ensure ineligible space (offices, admin services, parking) is not included in the election.

“It’s so simple to be wise. Just think of something stupid to say and then don’t say it. – Sam Levinson

As discussed in a prior “Did You Know,” pre-closing income tax liabilities have historically not been much concern for the buyer of LLC interests, since the income of LLCs (taxed as partnerships) is not a liability of the target company but its selling partners. However, under the “new” 2018 partnership audit procedures, any tax liability arising from an audit of a partnership (LLC) must be paid by the LLC itself unless the LLC makes a “push out“ election causing the members of the LLC to pay the tax. Therefore, an audit of a pre-closing tax year can result in tax on the LLC itself.

The solve has been for buyers to require partnership equity sellers to agree in the purchase agreement to make a push out election so the risk of the tax liability is on the seller not the buyer. However, now in transactions where the buyer is obtaining rep and warranty insurance, this may become less of a sticking point in negotiations. R&W insurers are willing to consider insuring against entity tax liabilities even without the sellers agreeing to a push out election depending on the seller’s overall organizational structure, the extent of partnership tax due diligence conducted by buyer’s tax due diligence advisors, and the overall tax risk profile of the target partnership. When offered, this coverage typically will not have a meaningful impact on the cost of the insurance. Of course, you will want to confirm with the insurance provider before agreeing on this point.

Bottom Line: The availability of coverage under a R&W policy can now eliminate disagreements over a push out election and at little, if any, additional cost.

“If you die in an elevator, be sure to push the UP button.” – Sam Levenson

The QOZ tax credits were enacted in 2017 and sunset on December 31, 2026. This credit allows taxpayers to defer until December 31, 2026, the taxation of gain that they reinvest in a QOZ. The amount of deferred gain that is taxable is reduced by 10% if the QOZ investment has been held for 5 years as December 31, 2026, and another 5% if it has been held for 7 years at that time. Any additional gain on the investment would not be taxable at all if it is held for 10 years.

The One Big Beautiful Bill Act (OBBBA) has permanently extended the QOZ tax credit with some changes. Here are a few highlights.

  • As with the prior law, if a QOZ investment is held for 5 years, only 90% of the deferred gain is taxable. The new law eliminates the additional 5% reduction in taxable gain for investments held for 7 years.
  • By contrast, for investments in Qualified Rural Opportunity Zones, if the investment is held for 5 years, the gain subject to tax is reduced to 70% (as opposed to 90% for non-rural investments).
  • Gain accruing on investments (whether urban or rural) after the 5th anniversary that are held for more than 10 years will still be nontaxable. However, any gain accruing after the 30th anniversary of the investment will be taxable.
  • As of January 1, 2027, for a census tract to qualify as a Qualified Opportunity Zone, it must have median income that is 70% or less of the Area Median Income (AMI) as opposed to 80% of AMI as under current law.

Bottom Line: The extension of the QOZ tax credits continues to be a great opportunity to defer gain on the sale of investments and now there are additional benefits available for rural investments.

“I fear one day I’ll meet God, he’ll sneeze and I won’t know what to say.”- Ronnie Shakes

Content by Marko Belej with assistance by summer associate Natalie Esshaki

Before the One Big Beautiful Bill was passed, Section 1202 allowed a taxpayer who held QSBS for a minimum of 5 years to exclude 100% of the gain from gross income. Now, Section 1202 has a more relaxed tiered-system in place, that ties the percentage of gain that a taxpayer may exclude to the amount of time that has passed since they acquired the QSBS. Stock acquired after July 4, 2025 is subject to these exclusion rates:
• 3 years: 50%
• 4 years: 75%
• 5 years or more: 100%

However, all non-excluded gain is subject to the 28% gains rate, not the standard long-term capital gains rates with a maximum of 20%.

Example: John purchases $100,000 worth of QSBS in an AI start-up on July 20, 2025. On August 30, 2027, John decides to sell the stock. The stock is now worth $1,000,000, which means John will realize a gain of $900,000. No portion of this gain is excludable under Section 1202. Thus, the long-term capital gains rate of 20% applies, and John’s tax liability is $180,000. If instead John sells his stock on August 30, 2028 when the stock is still worth $1,000,000, Section 1202’s 50% exclusion rate would apply. Therefore, John can exclude $450,000 of gain while the other $450,000 is subject to a 28% gains rate, making John’s tax liability $126,000.

Bottom Line: The One Big Beautiful Bill allows a taxpayer to utilize Section 1202 for a holding period of less than 5 years, but a partial exclusion does not equal a proportionate reduction in taxes.

“Sometimes you just have to put on lip gloss and pretend to be psyched.”
― Mindy Kaling

Most investors know that Qualified Opportunity Funds (QOFs) offer powerful tax benefits.  Taxpayers can defer the tax on the gains that are reinvested in the QOF until the earlier of December 31, 2026 or when they sell the QOF investment.  Investors in QOFs also have the potential to eliminate tax on all appreciation in excess of the original deferred gain if the investment is held for at least 10 years.  However, many investors are not aware that even if they sell or have a gain event with respect to their QOF, they can reinvest the gain into another QOF and continue to defer taxation and even receive nontaxable capital gains.   

As long as the investor reinvests within the 180-day period following the sale or gain event they may be able to defer that gain again.  They of course will need to meet all of the other requirements that apply to a QOF investment e.g., type and location of investment.  

This approach can provide flexibility if someone wants to exit a QOF investment early due to changes in performance, strategy, or personal needs—without immediately recognizing taxable income. Investors can continue to defer the original gain until the earlier of December 2026 or sale.  In addition, investors still have the potential to exclude future appreciation on the new QOF investment, but a new 10-year holding period begins with the new investment.  

Bottom Line:   By timely reinvesting an amount equal to the gain from an gain event with respect to your QOF investment, you can continue your deferral and potentially qualify for nontaxable capital gains after 10 years.  

“When I was growing up, I always wanted to be someone. Now I realize I should have been more specific.”— Lily Tomlin

Installment sales can be a great way to defer and sometimes actually reduce tax on the sale of property.  If certain requirements are met, a seller can report and pay tax on the profit from an installment sale as payments are received, rather than reporting and paying tax on all of the profit at the time of sale.  

However, be careful when a buyer assumes an existing loan on the property or takes a property “subject to” the loan in an installment sale because that can trigger taxable gain, even though you don’t receive any cash.  

If the amount of the loan exceeds your tax basis in the property, the excess of the loan assumed over the tax basis is treated as a payment received in the year of sale, which excess would all be taxable gain. In addition, all installment payments received thereafter would be 100% taxable gain.  

Example: Carl sells a property to Doug for a selling price of $1.6 million. The property is subject to a loan in the principal amount of $600,000. Doug will assume or take subject to the $600,000 loan and pay the remaining $1,000,000 in 10 equal annual installments together with interest. Carl’s basis in the property is $400,000. There are no selling expenses. In the year of the sale, Carl is deemed to have received payment of $200,000 ($600,000 loan assumed – $400,000 tax basis).  

In transactions like this, it would be advisable, if possible, to require payment of enough cash to satisfy any tax liability arising on the sale. 

Bottom Line:   Bottom line: If a buyer assumes a loan in the installment sale with a balance that exceeds your tax basis, you will have taxable gain in the year of sale, and 100% of the payments received in the future will be taxable.  

“You will find the key to success under the alarm clock.” – Benjamin Franklin