Year-End Action Items:
- If you established a QOF before July 2019, you will generally want to establish a subsidiary QOZB prior to year-end and contribute QOF assets into the subsidiary entity to avoid penalties.
- QOF’s established and funded by 12/31/19 will be eligible for the maximum 15% permanent tax “step-up” after a seven-year holding period. QOF’s established post -2019 are limited to a 10% step-up. If in doubt, it is best to estimate high and over-fund your year-end QOF.
The 2017 Tax Cut and Jobs Act created the federal Qualified Opportunity Zone (QOZ) program that offers flexible tax savings and diversification tool for taxpayers generating large gains. The goal of the program is to spur investments in low-income areas to promote business growth and economic revitalization providing social, community and individual benefits. Individuals, C and S Corporations, REIT’s, partnerships and other pass-through entities can sell their appreciated capital assets and elect to reinvest the resulting capital gain income into a Qualified Opportunity Fund (QOF).
To participate in the QOZ program, the taxpayer must roll all or a portion of their short-term or long-term capital gain into a QOF within 180 days of the recognition date of the gain. The QOF must then timely invest the deferred gains into undeveloped or developed real estate, a new or existing QOZ-based business, or other qualified QOZ property.
An eligible taxpayer who invests their capital gains into a QOF can defer reporting the initial gain for up to eight years. In addition to the deferral, there are also partial permanent tax savings (10% and 15% gain exemption) for holding the QOF investments for five or seven years, respectively. Gains accruing after the investment into the QOF will be tax-free upon sale if the investment is held for at least ten years. This full gain exclusion remains effective on QOF holding periods through December 31, 2047, giving investors up to 29 years to accrue (federal) tax-free gains.
California has not yet adopted the federal OZ program, therefore HCVT can assist you with comparing the pros and cons of QOF investing vs. other options such as 1031/Like-Kind Exchanges for real estate, installment sales, and other planning opportunities.
How it Works:
A taxpayer investing $1,000,000 of deferred tax gain into a QOF on June 30, 2018, will start with a $0 tax basis in the QOF since the gain has not been recognized. On July 1, 2023, after meeting the 5-year holding requirement the taxpayer will receive a 10% step-up to $100,000, leaving $900,000 of deferred tax gain, on July 1, 2025, the 7-year step-up of an additional 5% will bring the cumulative tax basis to $150,000 and lower the deferred gain to $850,000. On December 31, 2026, the deferred gain of $850,000 will be includable in the taxpayer’s 2026 tax return, and their QOF tax basis will then be $1,000,000 ($150,000 basis step-up plus the $850,000 deferred gain recognized).
Once the investor has held the QOF for at least ten years, the tax basis in the QOF will fluctuate with the changing fair market value, and the taxpayer can elect to exempt the post-investment federal tax gain upon disposition for as long as 2046 – allowing decades of potential tax-free appreciation.
How HCVT Can Help:
Investing in or creating a QOF requires careful analysis. The tax professionals at HCVT can help you evaluate the tax gain deferral and the business investment opportunity, provide recommendations for structuring, assist with tax compliance services, and provide assistance with the ongoing monitoring of the qualification of the QOF and sub-entities. For questions, reach out to our Opportunity Zone Team:
Click here to view the Opportunity Zones Map.
Click the button below to download our Opportunity Zone brochure:
- December 23, 2019
- April 30, 2019
- January 30, 2019
- December 6, 2018
- November 30, 2018
- August 1, 2018
HCVT in the News
- The Knowledge Group, February 5, 2020
- The Media Times , February 2, 2020
- OpportunityZoneExpo.com, January 15, 2020
- The Tax Adviser, December 19, 2019
- Park City Television, December 13, 2019
- Accounting Today, October 23, 2019
- Mapable USA, August 22, 2019
- BISNOW, August 5, 2019
- Accounting Today, August 1, 2019
- Bloomberg Law News, July 24, 2019
- Accounting Today, June 25, 2019
- The Knowledge Group, June 24, 2019
- League of California Cities: 2019 Mayors & Council Members Executive Forum, June 20, 2019
- Accounting Today, May 22, 2019
- Mapable USA Podcast, May 7, 2019
- Accounting Today, April 3, 2019
- Los Angeles Business Journal, March 8, 2019
- Long Beach Business Journal, February 25, 2019
- Urban Land, February 14, 2019
- SpareFoot Storage Beat , February 12, 2019
- Park City Television, November 15, 2018
- U.S. News, November 2, 2018