For any clients that realized real estate gains this year and missed a chance to re-invest those gains via a 1031 exchange, they still have an opportunity to mitigate their tax burden and grow new gains tax free by investing in a Qualified Opportunity Zone Funds.
As of now, the IRS position is that investors do not know their net gain position until 12/31/2019. This allows clients to invest in a QOZ Fund on 12/31/2019 of this year or within 180 days.
Only capital gains invested in QOZ funds are eligible for the following benefits (non-gain dollars are not):
- Capital gains tax deferral until 12/31/2026 for original invested gain (“OIG”).
- Permanent exclusion of 15% on the taxable OIG after a 7 year hold if invested by 12/31/2019 or 10% after a 5 year hold.
- Capital gains tax elimination on additional gains produced by QOZ funds after a 10 year hold.
What is a Qualified Opportunity Zone?
Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, were designed to spur investment in distressed communities throughout the country through tax benefits. Under a nomination process completed in June, 8,761 communities in all 50 states, the District of Columbia and five U.S. territories were designated as qualified Opportunity Zones.*Regulation The census data for this tax act was derived from the last census, which was conducted in 2010. Because of these we feel that some of these zones have already experienced meaningful gentrification. Once designated, the QOZ will remain a QOZ for ten years and cannot be modified or withdrawn, which date has been extended through December 31, 2047 for purposes of an election to defer gain. * Regulation
How did this come About?
The ‘Investing in Opportunity Act’ included in the Tax Cuts and Jobs Act passed in December 2017 (the “Act” or “QOZ Legislation”), put in motion an innovative way to stimulate private investment in low-income communities (Qualified Opportunity Zones or “QOZs”). Congress have taken this opportunity to invest in low income areas of the country that may have not participated in the financial expansion that we have experienced since the 2008 recession. That being said, since this data is based on the census track of 2010, a large percentage of QOZs are located within metropolitan areas. The Act offers the potential to unlock a substantial amount of unrealized capital gains sitting on American taxpayers’ balance sheets and redirect that capital to economically elevate these mostly urban communities while also generating potentially attractive, risk- adjusted returns for investors with favorable tax treatment.
If you would like to learn more on how to take advantage of this great opportunity or have any other questions, please reach out to our Opportunity Zone Specialist: Patrick Morehead (310) 410-8341 Patrick@vfgroup.net.
The opinions expressed are those of Patrick Morehead and VFG and not those of WestPark Capital, Inc. Securities offered through WestPark Capital, Inc. Member FINRA / SIPC. Advisory Services offered through Delta Investment Management. WestPark Capital, Inc., Delta Investment Management and VFG are not affiliated companies. WestPark Capital, Inc., VFG and Patrick Morehead do not offer Tax advice.