If you anticipate having a large capital gain before 2026, this is an investment you may want to consider.
If you are in the position of incurring a capital gain from the sale of stock, real estate or other investment you have a unique opportunity to not only defer paying the tax on these gains, but also to potentially eliminate any additional tax on the sale of your investment in a Qualified Opportunity Zone. While the path to deferral is a bit complicated and still in flux this opportunity is provided by the 2017 Tax Law changes passed by Congress. It’s been said that this could be the biggest thing to hit the real estate world in the past thirty years. (WSJ Oct 1, 2018). Investment must occur through a Qualified Opportunity Fund blessed by the IRS within 6 months of the Sale.
The Tax Cuts and Jobs Act of 2018 created tax deferral opportunities for capital gains which are invested in Qualified Opportunity Zones through the use of an entity called a Qualified Opportunity Fund. Capital gains that are realized prior to December 31, 2026 and subsequently reinvested in a Qualified Opportunity Fund within 180 days, will be eligible for the following deferrals under the tax law:
- The taxation of the capital gain proceeds which are reinvested will be deferred until December 31, 2026;
- The basis in the Qualified Opportunity Fund will increase if held for certain time periods (decreasing potential gain on a sale).
- If the investment in the Qualified Opportunity Fund is held for at least ten years there will not be any capital gains taxed upon the subsequent sale of the investment.
The Qualified Opportunity Zones for Florida have been established by Governor Scott, and approved by the IRS, and there are several opportunities in both Manatee and Sarasota Counties. The map can be found here.
Qualified Opportunity Funds Have Strict Requirements:It is anticipated that Qualified Opportunity Fund will need to be certified by the IRS. However, the Treasury has yet to release guidance on the certification process. At a minimum the Qualified Opportunity Fund is to consist of 90% of Qualified Opportunity Zone business property (by direct or indirect ownership), which: (i) was acquired after December 31, 2017; and (ii) the original use of the property commences with the Qualified Opportunity Fund’s ownership (i.e., the Qualified Opportunity Fund builds the property) or the Qualified Opportunity Fund makes substantial improvements to the property after the date of the acquisition. Further, the Qualified Opportunity Zone business property cannot engage in the following businesses: any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
Generally, the requirements to qualify for these deferrals of tax include:
- Realizing a capital gain from the sale of a capital asset to an unrelated third party; and
- Within 180 days, investing the capital gain into a Qualified Opportunity Fund, which is a corporation or partnership which consists 90% of assets located in a Qualified Opportunity Zone; and
- Electing to defer the gain from the sale or exchange.
Upon meeting the requirements, the tax deferral will be as follows:
- The capital gains incurred upon the sale of the capital asset will be deferred until the earlier of:
- December 31, 2026; or
- When the investment in the Qualified Opportunity Fund is sold.
- The amount of capital gain recognized will be the lesser of:
- The amount of capital gain deferred; or
- The fair market value of the Qualified Opportunity Fund less your basis in the Qualified Opportunity Fund investment. For this purpose, the tax law provides increases in your basis, and therefore a reduction in the deferred gain, over time as follows:
- If the Qualified Opportunity Fund is held for at least 5 years, the taxpayer’s basis will be increased so that only 90% of the deferred gain is realized.
- If the Qualified Opportunity Fund is held for at least 7 years, the taxpayer’s basis will be increased so that only 85% of the deferred gain is realized.
There is a potential to permanently defer any additional gain on your Qualified Opportunity Fundinvestment, if held for 10 years.
In the event that a taxpayer holds a Qualified Opportunity Fund investment for at least ten (10) years, the taxpayer will not be subject to any additional capital gain on sale of the Qualified Opportunity Fund investment.
For additional information or questions regarding Qualified Opportunity Zone investments and the tax benefits please contact one of our tax attorneys, Jenifer Schembri at jschembri@blalockwalters.com or Kristen Ehrlich at kehrlich@blalockwalters.com.
Jenifer S. Schembri
Kristen Ehrlich
