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What happens to the deferred tax liabilities if capital gains tax rate changes?

If I make an OZF investment in 2020, hold that investment for five years and defer the capital gains on the invested capital until 2025, what would be the implications of an increase in capital gains tax rate in say, 2022? Is there a situation where even with the 10% step-up in basis, the investor could end up paying higher capital gains given the increased rate by the time the deferred taxes are due?

  • Maria De Los Angeles Rivera
    August 20, 2020

    The regulations clearly state that the tax rate that will apply is the tax rate at the moment or for the year of recognition.

  • Matthew Rappaport
    August 09, 2020

    The rate on which the deferred capital gains are taxed is the prevailing rate during the year of recognition. The preamble to the regulations is absolutely clear on this point. You will face the risk that the rates go up and you'll owe more than you did originally. You'll have to weigh that risk against the five-year benefit.

  • Brad Cohen
    August 07, 2020

    You pay the capital gains rate of the year when the inclusion event happens. In your case, that of 2025.


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