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Private markets: how the tax rules work
Private funds, direct startup equity, opportunity funds, and exchanged real estate each carry statutory tests and dated deadlines. Each panel below states the rule and computes it against figures you enter. Every result is a computation under stated assumptions, not a recommendation, and eligibility itself is never assumed.
Holdings on file
| Holding | Type | Held in | Committed | Called | Uncalled | Stated value | Acquired | Calculate |
|---|---|---|---|---|---|---|---|---|
| Alto Robotics | Direct startup equity | Taxable / individual | $0 | $0 | $0 | $6,400,000 | 2026-02-01 | 1202 |
| Cascade Opportunity Fund II | Qualified opportunity fund | Taxable / individual | $0 | $1,200,000 | $-1,200,000 | $1,310,000 | QOF | |
| Meridian Ventures VI | Venture capital fund | Taxable / individual | $1,000,000 | $420,000 | $580,000 | $505,000 | 2024-09-15 | |
| Ridgeline Credit II | Private credit fund | Self-directed IRA | $500,000 | $500,000 | $0 | $548,000 | 2023-06-01 | UBTI |
Findings from the latest review
- info Alto Robotics: stock acquired 2026-02-01 reaches the 3-year section 1202 mark on 2029-02-01, where the exclusion tier is 50%. The tier at today's date is 0%. - for discussion with a professional
- info Alto Robotics: the per-issuer section 1202 cap is $15,000,000, the greater of $15,000,000 and ten times the $250,000 of basis on file. $0 of that cap is recorded as used, leaving $15,000,000. - for discussion with a professional
- warn CA does not follow the federal section 1202 exclusion. Gain excluded on the federal return for Alto Robotics stays in state taxable income. - for discussion with a professional
- warn Cascade Opportunity Fund II: $1,200,000 of deferred gain is scheduled for recognition on 2032-04-01, about 5 year(s) from today. The tax falls due with that year's return while the fund interest itself stays illiquid. - for discussion with a professional
- info Cascade Opportunity Fund II: the five-year mark falls on 2032-04-01, where basis in the deferred gain rises by 10%, which is $120,000 on the gain on file. - for discussion with a professional
- info Cascade Opportunity Fund II: the ten-year mark falls on 2037-04-01. From that date a fair-market-value election excludes appreciation earned after the investment, through 2057-04-01. - for discussion with a professional
- warn Ridgeline Credit II in the Self-directed IRA reports $38,000 of gross unrelated business taxable income. At $1,000 or more of gross UBTI the account files Form 990-T, and $11,621 of tax at trust rates is paid out of the account. - for discussion with a professional
- info Section 1202 turns on facts not held here: original issuance from a domestic C corporation, the 80% active-business test, the excluded trades and businesses, and the redemption rules. Figures shown for 1 holding(s) assume those tests are met. - for discussion with a professional
- info Trust rates reach 37% at $16,000 of taxable unrelated business income, far below the income level where that rate applies on a personal return. - for discussion with a professional
- warn $580,000 of capital across 1 commitment(s) is uncalled. Capital calls run on short notice, against cash of $395,000 on file. - for discussion with a professional
- info Spread evenly over 3 years, uncalled capital of $580,000 is about $193,333 a year against cash of $395,000. Cash covers about 2.0 year(s) of calls at that pace. - for discussion with a professional
- warn Uncalled capital of $580,000 is $185,000 more than the $395,000 of cash on file. Calls that outrun cash are met by selling something, and private interests are the least saleable holding in the household. - for discussion with a professional
- warn Private holdings carry $8,763,000 of stated value, 73% of household net worth, above the 25% review threshold. Private marks are reported by the manager and lag traded prices. - for discussion with a professional
- info 3 holding(s) issue a Schedule K-1. K-1s often arrive after the April filing date, and an extension is the ordinary path while one is outstanding. - for discussion with a professional
Strategies
Qualified small business stock (section 1202)
Gain on original-issue stock in a small C corporation can be excluded from federal income once a holding period is met. OBBBA added a tiered exclusion for stock acquired after July 4 2025 and raised the per-issuer cap.
How the rule works
- Stock acquired after July 4 2025 excludes 50% at three years, 75% at four, and 100% at five. Stock acquired on or before that date keeps the five-year period and the 100% exclusion.
- The per-issuer cap is the greater of $15 million ($10 million under the older rules) and ten times adjusted basis.
- The cap limits the gain taken into account, and the exclusion percentage applies to that capped amount afterward.
- Eligible gain the tier does not exclude is section 1202 gain, taxed at 28%. Gain above the cap is long-term capital gain at the ordinary capital rate.
- Section 1045 allows a rollover into replacement stock within 60 days when the stock was held at least six months, with no dollar cap.
Not modeled here
- Eligibility itself: domestic C corporation status, original issuance, the 80% active-business test, the excluded trades and businesses, and the redemption rules.
- Any alternative minimum tax effect on partially excluded gain.
- Stacking the per-issuer cap across non-grantor trusts.
Qualified opportunity fund
Capital gain rolled into an opportunity fund is deferred, picks up a basis step-up at five years, and after ten years an election excludes the fund's own appreciation. OBBBA made the programme permanent on a rolling clock.
How the rule works
- Gains invested after 2026 run on a rolling five-year deferral: the gain is recognized five years on, or on an earlier sale.
- The five-year basis step-up is 10% of the deferred gain, or 30% for a qualified rural opportunity fund.
- Gains invested on or before 2026 are recognized on December 31 2026, and investments made after 2021 reach no step-up at all.
- After ten years, a fair-market-value election excludes appreciation earned after the investment, through a thirty-year outer limit.
- Deferral moves when the tax is paid. The step-up is the only part of the deferral leg that changes the amount.
Not modeled here
- The rates in force in the recognition year, which the calculation cannot know. The household's current rates are used.
- Fund-level compliance: the 90% asset test, substantial improvement, and the rural designation itself.
- The additional 5% step-up for investments made before 2020.
Carried interest (section 1061)
A carried interest held three years or less has its long-term capital gain treated as short-term, which moves it from the capital rate to the ordinary rate.
How the rule works
- The test is more than three years. A disposition on the three-year anniversary itself is still recharacterized.
- The cost is the gap between the ordinary rate and the long-term rate on the recharacterized amount.
- The 3.8% net investment income tax applies to short-term and long-term gain alike, so it does not widen the gap.
- Section 1061 does not reach an interest held by a C corporation.
Not modeled here
- The recharacterization computation itself: the one-year versus three-year distributive share, lookthrough, and related-party transfer rules.
- Section 1231 gain from real property, qualified dividends, section 1256 contracts, and allocations on invested capital, all outside section 1061.
- Bracket crossing: one ordinary rate is applied to the whole amount.
Section 1031 exchange
An exchange of investment real estate defers the gain and the depreciation recapture into the replacement property, on two clocks that do not extend.
How the rule works
- Replacement property is identified within 45 days and the exchange closes within 180 days of the relinquished closing.
- The 180-day period is itself cut short by the unextended return due date. Extending that return restores the full period.
- Unrecaptured section 1250 gain is taxed at the lower of 25% and the ordinary rate, so 25% is a ceiling rather than a rate.
- Cash boot and any equity not carried into the replacement are recognized, recapture first.
- The deferred gain rides forward in the basis of the replacement property.
Not modeled here
- Section 1245 recapture on personal-property components, which is ordinary income and is not sheltered by a real-property exchange.
- State clawback regimes that tax the deferred gain when a replacement property leaves the state.
- Related-party rules and the identification limits (three-property, 200%).
UBTI and UDFI in a retirement account
A leveraged private fund held inside an IRA can generate unrelated business taxable income, which is taxed at trust rates and paid out of the account.
How the rule works
- At $1,000 or more of gross unrelated business taxable income the account files Form 990-T. The threshold is measured on the gross figure.
- The same $1,000 is also a specific deduction, so tax starts on the first dollar above it rather than on the whole amount.
- Debt-financed income is unrelated business taxable income in proportion to the debt, unless the fund blocks it at the entity level.
- Trust rates are compressed: the top rate arrives at roughly $16,000 of taxable income.
- In a Roth account the tax is paid out of a balance whose qualified distributions are otherwise free of tax.
Not modeled here
- The debt-financed percentage computation: average acquisition indebtedness over average adjusted basis, with the twelve-month lookback.
- State filing obligations on unrelated business income.
- The section 514(c)(9) exception, which reaches qualified pension trusts rather than IRAs.
Educational modeling only. These rules turn on statutory tests that a household's own records cannot settle, and the figures assume those tests are met. Amounts, dates, and eligibility are for confirmation with a qualified tax professional before any filing position is taken.