As the year comes to a close, the opportunity zone market seems to be picking up steam. Over the past six months, Much's Real Estate group has helped clients form Qualified Opportunity Funds (QOF) and close on Qualified Opportunity Zone (QOZ) development sites in the Bronzeville and Pilsen neighborhoods of Chicago, as well as in Houston, Philadelphia, Reno, Charleston, Portland and Silver Spring.
To take advantage of the significant tax benefits that come with QOF investments, developers and investors need to be cognizant of several deadlines and timeframes set forth in the applicable IRS code sections and proposed regulations:
Investments Made in 2019
Capital gains invested in a QOF on or before December 31, 2019 will be eligible for the greatest tax benefits, including a deferral of tax payments due on those gains until December 31, 2026, as well as a 15 percent break on the taxes due with respect to those gains.
Investments Made in 2020 and 2021
Investors who make their investments in 2020 and 2021, and hold their investments for at least five years, will be entitled to a 10 percent break on their deferred capital gains tax due on December 31, 2026. While the 5 percent differential may not be material – a one-day delay could cost an investor roughly $11,900 (i.e., $50,000 x 23.8 percent) more in taxes with respect to a $1 million investment – it should still be a consideration for those investors and developers who have already identified QOZ projects into which they are ready to invest or purchase and develop.
Key Benefits
While the deferral of the capital gains tax until December 31, 2026 is an important tax benefit, the real attraction and benefit of investing in a QOF is that if the new QOF investment is held for 10 years, 100 percent of the new capital gain on that investment is free of any tax. This is the benefit that has generated the most interest and excitement in the QOZ program. Accordingly, perhaps the most important date to keep in mind is December 31, 2028, which is the last day an investor can invest in a QOF and reap this key benefit. Mark your calendars!
If you are interested in a potential QOF investment, in forming a QOF so that it can accept funds before the end of the year or if you have questions about the QOZ program, contact Dan Bronson.