In December 2019, the United States Treasury recently released guidelines in Subchapter Z of the Internal Revenue Code. the regulations play the vital role of clarifying earlier 2018 and 2019 regulations about financial opportunity zones. This article briefly reviews some of the most important lessons to be learned from this announcement.
The Role of Opportunity Zone Investment
The Tax Cuts and Jobs Act of 2017 created many estate planning changes including the introduction of opportunity zone provisions. These provisions allow people to defer capital gains tax by reinvesting the amount in a qualified opportunity fund (QOF). A QOF is a low-income tract A WOF is an entity created to invest in opportunity zone property and must hold at least 90% of its assets in qualified opportunity zone property (QOZ). QOZ property must satisfy four elements:
- The property must be used in a business or trade of a QOF or QOZ
- The entity must acquire the property for purchase after December 31, 2017
- The property must be either used by the eligible entity in the QOZ or substantially improved by the entity
- During the holding period for the property, all of the property’s use must be in a QOZ
Clarification # 1 – Eligible Gains
A person must invest in “eligible gains” to benefit from QOF investment, which can include gains from the disposition of capital assets, gains from the disposition of Section 1231(b) property, and other forms of income treated as a capital gain. Eligible gain, however, does not include recapture gain that is treated as ordinary income. This will have a favorable result for taxpayers because capital gains can be invested even if a person is offsetting capital gains losses. 1231 gains are normally determined at year-end rather than become immediately available on recognition as an eligible gain.
Clarification # 2 – Application to Tax-Exempt and Foreign Investors
Eligible gains only include amounts that would be subject to federal income tax, which will substantially impact both foreign and tax-exempt investors. This means that these entities are limited to what can be invested in a QOZ.
Clarification # – When Elections Must Be Made
Before these clarifications, some uncertainty existed about how the election period should be calculated. These changes have made clear that to benefit from QOZ provisions, taxpayers must invest in eligible gains within 180 days of the date that a taxpayer would recognize the gain. In cases involving regulated investment company (RIC) and real estate investment trusts (REIT) capital gain dividends, this 180 day period commences at the end of a shareholder’s taxable year in which a gain would be recognized or the date at which the capital gain dividend is paid.
Speak with a Skilled Estate Planning Attorney
While many of these clarifications will result in advantages for taxpayers, not all of them do. If you are interested in utilizing opportunity zone investment as part of your investment strategy or have questions about the process, you should not hesitate to speak with an experienced estate planning attorney. Contact Ettinger Estate Planning today to schedule a free case evaluation.