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 can I maximize my QSBS gains with section 1045?
Is section 1045 worth the risk of losing my previous gains?