September 6, 2019
Overview of the federal Opportunity Zone program
The Opportunity Zone (OZ) program encourages the private sector to liquidate appreciated assets and to diversify their investment portfolios while revitalizing urban and rural districts that face economic challenges. The goal is to build wealth in needy communities by offering investors a reduction in their federal capital gains tax.
1. The OZ program became effective 01/01/2018
2. OZ program offers taxpayers the opportunity to divest of appreciated assets and re-invest gains into qualified OZ projects in a tax-efficient manner. Unlike a 1031 like-kind exchange, the OZ program is not limited to taxpayers with real estate gains and does not require reinvestment of gains into similar real estate properties. Real estate gains under the OZ can be invested into a wide variety of projects within a designated OZ, including qualifying businesses, startups, and other ventures.
3. Gains eligible for the OZ program can be realized from selling a wide variety of capital assets including land, developed real estate, stock or bond portfolios, artwork, collectibles, bitcoin, as well as other tangible and intangible assets.
4. Ordinary gains are not eligible for investment in OZ’s.
5. The eligible gain must be re-invested into a Qualified Opportunity Fund (QOF) within 180 days of recognizing the gain on sale. FYI – regardless of the actual date of sale during a calendar year, eligible gains from partnerships, S corporations and trusts are reported as of Dec 31st. As a result, reinvestment can occur up to 180 days into the next tax year and still be an eligible OZ investment.
6. Taxpayers in high-tax states that have not adopted the OZ program and allow tax deferral on real estate transactions under 1031 like-kind exchanges may want to consider a 1031 exchange rather than an OZ investment. Investors who are older or in poor health since the real estate will get a step up in basis to fair market value upon death in a 1031 exchange transaction, which is not the case with OZ held assets.
7. Another difference between 1031 exchanges and OZ investing is only the capital gain portion (all or a portion) of the transaction needs to be reinvested. Whereas a 1031 exchange requires all proceeds to be reinvested. As a result, an OZ investment can provide the taxpayer with immediate tax-free liquidity to the extent the taxpayer receives the return of their principle from the sale.
8. You are required to invest through a Qualified Opportunity Fund (QOF). You are not allowed to make direct investments in properties or businesses within an OZ. In order to be a QOF, the entity must be a C corporation, S corporation or partnership (including LLC’s treated as a partnership). A QOF can represent a single investor or multiple investors.
9. The federal tax benefit for participating in a QOF includes:
a. Deferring gains from tax up to 8 years
b. Permanently exempting gain from federal tax if:
I. 10% of gain exempt from tax after holding investment 5 years
II. 15% of gain exempt from tax after holding investment 7 years
III. 100% of gain exempt from tax after holding investment 10 years
Example: Taxpayer invests $150,000 of capital gains from a sale on 12/31/19 into a QOF on or before 06/30/2020. To start, the taxpayer has a $o tax basis in the QOF investment since the gain has not been recognized. Here is the timeline of potential tax benefits from holding investments in a QOF:
· After five years – 10% step-up in tax basis to $15,000 resulting in a deferred gain of $135,000.
· After seven years – 15% step-up in tax basis to $22,500 resulting in a deferred gain of $127,500.
· After ten years – 100% step-up in tax basis to $150,000 resulting in a deferred gain of $0.
Due to the fact that OZ’s are so new, there are numerous uncertainties surrounding the program and additional guidance will be needed from the IRS. Regardless, taxpayers with highly appreciated assets need to consider the OZ program and work with their tax and financial advisors to determine if an OZ investment is a good fit for their situation.
Last Word! Like all investments, the financial merit of an investment is the top priority. If you get distracted by the favorable federal tax treatment of an OZ investment, you may overlook the financial fundamentals required for a prudent investment.
We can all get caught up in the day…meetings, calls, texts, emails and the myriad of other workday demands that pile up quickly and can create unwanted stress.
Overview of the federal Opportunity Zone program
The Opportunity Zone (OZ) program encourages the private sector to liquidate appreciated assets and to diversify their investment portfolios while revitalizing urban and rural districts that face economic challenges. The goal is to build wealth in needy communities by offering investors a reduction in their federal...
Labor Day is upon us—a popular holiday that is dedicated to the millions of women and men who keep this country going strong. For many, it also means that it’s time to break out the grill for that big end-of-summer celebration. And because most of us aren’t Grill Masters, this is a good time for a refresh on some basic grilling safety tips to keep everyone safe and the party going.