Upcoming December 31 Deadline for Qualified Opportunity Zone Investments

Investors with capital gains, including Sec. 1231 gains, should be aware of the looming December 31, 2019 deadline in order to fully benefit from tax benefits that Qualified Opportunity Fund investments may potentially provide.

The Tax Cuts and Jobs Act enacted a new opportunity for investment in designated distressed communities in order to encourage economic growth. This new incentive creates Qualified Opportunity Zones in which investors who recognize capital gains can defer or eliminate the capital gain by investing the gain proceeds into a Qualified Opportunity Fund (“QO Fund”).

There are three main initiatives in investing in a QO Fund:

  1. Tax deferral of the Capital Gain

Capital gain invested in a QO Fund within 180 days after the sale of the asset is deferred. The gain is deferred to the earlier of (i) the date on which a QO Fund is disposed or (ii) December 31, 2026.

  1. Basis increase deferred Capital Gain investment

An investor’s initial tax basis of a QO Fund is zero since the cash being invested is from a transaction in which the capital gain is being deferred. However, if the investor holds the interest in a QO Fund for at least five years, the tax basis is increased by 10% of the deferred capital gain; if the interest is held for at least seven years, the basis of the deferred gain is increased by an additional 5% of the original capital gain. Hence there is a potential of an overall basis step up of 15% of the deferred capital gains which will benefit the investor when they recognize the income by December 31, 2026.

  1. Elimination of the appreciated gain if invested at least 10 years in a QO Fund

Investors that hold the QO Fund investment for at least 10 years can receive the added benefit of paying no tax on any realized appreciation in investments made with the QO Fund.

Investors interested in investing in a QO Fund should be aware that December 31, 2019 is the last day in which eligible capital gain invested in a QO Fund will be able to benefit from receiving the full 15% basis step up on their deferred capital gain. For investments made for two years after January 2020, investors won’t pay tax on 10% of their deferred capital gains.

Investors that have recognized or will recognize Section 1231 gains during 2019 or 2020 should contact a Sax advisor to discuss the technicalities associated with the timing of an investment into a QO Fund.

Investing in a QO Fund can be beneficial to investors who have capital gains generated during 2019. The advisors at Sax will be sure to keep you updated on relevant developments as they emerge. For any questions on Qualified Opportunity Zones or setting up a Qualified Opportunity Fund, reach out to an expert within Sax’s Real Estate Practice at (973) 472-6250.