Jun 20, 2019
Update on Opportunity Zones
Most real estate investors are aware that there are tax deferral opportunities when selling investment property such as reinvesting in replacement property using a so-called 1031 exchange. Another tax deferral strategy has been newly created but the property sold that gives raise to taxable gains is not limited to gains on the actual sale of real estate. In the last couple of years, a lot has been written about Opportunity Zones and Qualified Opportunity Zone Funds. This topic has been discussed in two previous newsletters from our firm’s Real Estate Practice Group, which may be beneficial to review.
Real Estate Focus – Winter 2019 edition
Bringing concept to reality: more thoughts on Opportunity Zones in Chicago
Real Estate Focus – 2018 edition
When opportunity knocks: investing in Illinois’ Opportunity Zones
In the fall of 2018, the Department of Treasury issued a first set of proposed regulations in connection with the tax rules and, most recently, on April 17, 2019, a second set of proposed regulations were issued. Both sets provide needed clarity regarding Qualified Opportunity Zone Funds. The newest proposed regulations appear to be favorable to taxpayers and reflect the government’s desire to encourage investment in these funds.
Generally, there are significant tax benefits for investors who make a qualifying investment in a Qualified Opportunity Fund (QOF):
- the investor receives a deferral of eligible gains if the gains are invested in a QOF within 180 days after the gains are realized provided the investor makes an election to defer the gains;
- if the investment in the QOF is held for more than five years, the potential gain is reduced by having tax basis increased by 10% of the gain initially invested;
- if the investment in the QOF is held for more than seven years, the potential gain is reduced even further; and
- if the investment in the QOF is held for 10 years or more, there will be no gain recognized, generally, on the investment in the QOF.
The regulations address many issues, both in terms of the requirements for the funds themselves to qualify and for the investors in those funds. Despite all of the tax benefits there are questions as to whether or not Opportunity Zones themselves will spur the economic growth in distressed areas, as desired by the statute (See Crain’s Chicago Business, April 15, 2019, article by Michelle D. Layser - https://www.chicagobusiness.com/opinion/tax-incentives-target-poor-neighborhoods-leave-communities-behind).
The tax deferral opportunities are not limited to gains from sale of real estate. But, unlike 1031 exchanges, the tax deferral from investing in a QOF is temporary, as the deferred gain will be recognized no later than December 31, 2026. Investment in QOFs will continue to be a hot topic in 2019 and the new regulations are both helpful to advisors and beneficial to taxpayers.
For a more thorough review of the rules and to determine if an investment in a QOF is beneficial to you, seek guidance from qualified commercial real estate, tax and trusts attorneys.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: Mitchell D. Weinstein, Principal and President