2017 Essential Tax and Wealth Planning Guide
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Tax implications of fund investing
Conclusion
Introduction
What is an investment fund?
Types of investment
funds and income tax
characteristics
• Marketable securities
Hedge funds
• Private equity/venture capital
Publicly traded partnerships
Real estate funds
.
Fund of funds
Investment fund attributes
• Trader versus investor
.
.
entities
Passive versus
non-passive income
Separately stated activity
(including PTPs)
Qualified small business
stock (QSBS)
Unrelated business
taxable income
• State tax reporting
Conclusion
With a solid understanding of the various types of funds and how specific attributes of the funds impact your tax position and tax compliance
obligations, you can make more informed investment decisions. Considering that the ordinary tax rate is currently 39.6%, the net investment
income tax rate is 3.8%, and many states/localities have income taxes, it is not uncommon for investment returns to be potentially taxed as
high as 50%.
Below are some actions you may consider taking and questions you may consider asking before making an investment:
Review the investment strategy
and tax consequences section of
the offering documents or private
placement memorandum.
Understand the character of the
income likely to be allocated from
the investment.
Understand anticipated state sourced
income expectations and whether the
fund will file a composite return or
submit withholding on your behalf if
there is state sourced income.
For marketable security and hedge
funds, understand provisions for
being able to redeem capital.
Understand the timing when periodic
economic and tax information will be
delivered.
Assess how the income allocated from
the investment impacts your facts
and tax posture.
Inquire whether the fund is a
domestic fund or foreign fund to
evaluate reporting requirements.
For private equity and real estate
funds, understand anticipated timing
of capital calls and estimated fund
life.
Ask for a sample prior year Schedule
K-1. If the fund is new, ask for a
representative Schedule K-1 from a
similar fund.
If a tax-exempt investor is making the
investment, what, if any, UBTI can be
anticipated.
Inquire about foreign filings and
expected type and volume.
For private equity and real estate
funds, understand whether the
activities will be separately stated
on Schedule K-1.
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Resources
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2017 Essential Tax and Wealth Planning Guide | Tax implications of fund investing
As taxpayers seek to diversify their portfolios, we anticipate that opportunities to invest through funds will continue to grow. Therefore,
understanding the tax consequences associated with the investments will allow you to proactively plan and enhance your investments.
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