The Opportunity Zone program established by 2017’s Tax Cuts and Jobs Act ushered in a new set of compelling tax incentives for real estate investors. State and local governments identified historically under-invested communities—over 8,700 ratified Qualified Opportunity Zones (QOZ) throughout the country. The program offers the potential to substantially enhance post-tax returns, but the investment must consist of capital gains and require a minimum hold of 5+ years to benefit in substantial tax reduction and 10 Years to benefit from elimination of taxes on the capital gains invested. As 2019 draws to a close, it is important for investors to understand the time-sensitive nature of the tax benefits associated with Opportunity Zone investments.
Opportunity Zone Tax Benefits: A Quick Recap
In short, Qualified Opportunity Zone investments allow for the deferral, reduction, and elimination of capital gains tax.
What December 31st, 2019 means for Opportunity Zone Investing
The Opportunity Zone program provides for a step-up in basis for investments held for five years, and an additional step-up in basis for those held for seven years, for investments made prior to December 31st, 2026. In order to maximize the tax benefits afforded by the program, December 31, 2019 is the last day on which investors can complete a Qualified Opportunity Zone investment and hold it for a full 7 years. In other words, this coming New Year’s Eve is the last day to roll over preexisting capital gains into a QOZ real estate project and achieve a 15% reduction in tax owed on those capital gains.
This does not mean that December 31, 2019 is the last day investors should consider Opportunity Zone real estate investing. Investors can still benefit from the following:
- A 10% reduction in taxes on capital gains reinvested into a QOZ investment held for more than five years;
- 100% forgiveness on capital gains realized in connection with a QOZ investment if held for 10+ years;
- Deferral of capital gains until 2027 for the investment proceeds created on the sale of an asset to make a QOZ investment.
As a hypothetical example, assuming an investor is in the highest long term capital gains tax bracket (23.8%), the total capital gains tax on $1M would be $238K.
With the Qualified Opportunity Fund tax incentive for a seven-year hold, however, the investor would pay a capital gains tax on only $850K resulting in savings of more than $35K on their tax bill.
If the investor waited until after December 31, 2020, to invest their $1M capital gain into a QOF, at the end of seven years the investor would pay tax on $900K. This one-day delay results in a decreased tax benefit to an investor of nearly $12K.
As the deadline approaches, the QOZ marketplace has experienced a $4.5 billion infusion of committed investment capital—a 40% increase over the 50 days preceding the publishing date of this article, according to Novogradac, a national accounting and consulting firm that tracks QOF investment.
Reporting your Capital Gains Investment into QOF
Individual taxpayers would report gain from the sale of stock on Form 8949 and Schedule D Form 1040. Form 8949 is a federal tax form that was in use prior to the Opportunity Zone rules and is used to report sales of capital assets such as stock. There has been no change to these forms from 2017 to 2018. If you invest your gains into a QOF, your tax preparer will use form 8949 to report the investment by entering code Z in column (f). By making this submission, the IRS knows you are deferring your gain.
Maintain Focus on Quality Investments
The tax incentives afforded under the Opportunity Zone program were created to rapidly spur capital flows to underserved communities, hence the time-sensitive nature of the tax reduction incentives. All investors should properly consider investment opportunities and whether they align with liquidity requirements and overall risk strategy. But, to maximize the tax benefits, December 31, 2019 is a critical date.
At 33 Holdings LLC, our approach has always been to only pursue projects that are attractive on their face, irrespective of Opportunity Zone qualification. A recent MIT report found that tax benefits have already been priced into properties within Qualified Opportunity Zones, with assets trading at a premium relative to non-eligible assets. This lends further credence to our approach of thoroughly evaluating the market, and examining the going-in basis, absent of any potential enhancements to post-tax returns.
If you are considering an 33 Holdings LLC ‘s QOZ Fund : 33 Tax Advantaged Opportunity Zone Fund LLC before year-end, our dedicated Investor Relations team is ready to address any of your questions. Please feel free to reach out at any time by emailing us at firstname.lastname@example.org
Disclaimer: It is important to note that 33 Holdings LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your own accounting advisor before engaging in any transaction.