Window Of Opportunity Closing For Opportunity Zones

Monday, January 24, 2022

By Susan Kaplan

The possibility of higher capital gains rates has fueled interest by investors in Qualified Opportunity Zone funds. Investment is incentivized by a deferral of capital gains that otherwise would be reported in the year they were realized. With the tax recognition deadline of December 31, 2026, still in place, taxpayers who wish to invest unrecognized gains in QOZs need to do so prior to December 31, 2021, in order to obtain any step-up in basis benefit.

Although some investors missed the original deadlines, they can still get a 10% break on the taxable amount of their investment if they hold it for at least five years by the end of 2026, but that benefit that goes away after 2021. The icing on the cake is the 100% exclusion of tax on the appreciation of assets placed into the fund. The 10% forgiveness after five years applies to the gain on the sale of assets put into the fund, while the entire exclusion from tax applies to any appreciation after the amount is in the fund.

Understand the risks – and the rules. Recently, taxpayers were granted additional relief with respect to the 180-day window for investment, the reasonable cause exception to the 90% test, and additional time for any property being substantially approved. However, the gain recognition deadline has not yet been extended. For taxpayers, this means that any deferred gain on assets held in a QOZ must be recognized by the taxpayer by December 31, 2026.

Only a few states have not followed the federal treatment of qualified opportunity funds. New York decided that, effective in 2021, they would pull out of the program for new investments.

CONTACT US: Qualified opportunity zones allow investors to redirect some or all of their unrecognized capital gains into underserved, economically distressed communities in exchange for tax breaks assuming certain requirements are satisfied. With the tax recognition deadline of December 31, 2026, still in place, taxpayers who wish to invest unrecognized gains in QOZs need to do so prior to the yearend 2021, in order to obtain any step-up in basis benefit. An increase in the basis of the unrecognized gain is available if the unrecognized gain is invested in a QOZ for five years (10% basis step-up). Even if satisfying the five-year requirement for a 10% basis step-up is not possible, investors will still receive the benefits of a deferral of capital gains until December 31, 2026 and an elimination of the tax on any gains from a QOZ investment if the QOZ investment is held for 10 years. Questions? We have answers!