Section 1045 of the tax code allows holders of Section 1202 QSBS to roll over their investments into a new QSBS investment if the QSBS is sold before the five year holding period has come to fruition. After the sale, to roll the Section 1202 gains over to a new QSBS investment there are a few requirements, which are outlined below.
- The original QSBS investment must have been held for at least 6 months.
- The QSBS holder has 60 days to reinvest the Section 1202 gains before losing the QSBS qualification.
- The holder must make the correct Section 1045 rollover filing on or before the due date of the current year’s tax return, including extensions.
- Only the first 6 months of the Section 1045 investment must follow the active trade or business test under Section 1202(c)(2).
- The entire proceeds from the sale of the original QSBS must be reinvested to receive the full gain deferral.
A hypothetical example:
An investor purchased $1 million in section 1202 QSBS in January 2012. In December 2015 the company was acquired with a realized capital gain of $5 million to the investor, putting her in an inevitable position to owe high capital gains taxes. Using Section 1045, the investor reinvested the original $1 million investment and $5 million in capital gains to another QSBS company, deferring $1.19 million ($5 million x 23.8%) in capital gains taxes. In January 2018 the second company sold for a total realized gain of $10 million, which the investor was allowed to exclude, saving $2.38 million ($10 million x 23.8%) in capital gains taxes.
Frequently Asked Questions
How do I apply for Section 1045?
Can I Reinvest My QSBS Gains Into Multiple Section 1045 Rollovers?
What is the section 1045 QSBS 60 day limit?
Do Convertible notes qualify for section 1045?
How can I maximize my QSBS gains with section 1045?
Do Section 1045 Rollovers Have to Follow Section 1202 QSBS Requirements?
How long do I have to hold my QSBS to use section 1045?
Do I Have to Reinvest My Full QSBS Gain to Elect the Section 1045 Rollover?
Is section 1045 worth the risk of losing my previous gains?
Can venture capital investments elect section 1045 QSBS?
Can I Defer Gains Over the Section 1202 Limit With Section 1045 Rollover?
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
