Steps to ensuring that you receive the tax benefits of your opportunity zone investment.
In Parts I, II, and III, we provided some background and rules for the Opportunity Zones Program, part of Congress’ new tax reform package that provides a new tax incentive for real estate investors and venture capitalists to assist distressed communities in the United States.
In our final post of this series, we are going to explain what you need to do to take advantage of the tax benefits of this new type of investment.
How do opportunity zones work?
There are Opportunity Zones in every state and territory in the United States – if even a small percentage of taxpayers reinvest their capital gains in the opportunity zones program, it could have a significant impact on many economically-challenged communities. Here are the basics on how it’s done:
- You sell your appreciated assets. All sources qualify, including real estate, stocks, bonds, partnership interests, etc.
- Within 180 days, you put your capital gains into a “qualified opportunity fund” (QOF), a corporation or partnership operating in an opportunity zone. This is known as the “180-day rule.” See 26 U.S. § 1400Z-2(a)(1)(A).
- The QOF you have selected then invests in qualified opportunity zone business property or in a subsidiary opportunity zone business. If the original use of the property does not commence with the QOF, the Proposed Regulations stipulate that existing opportunity zone property may qualify if the QOF purchased it after December 31, 2017 and makes “substantial improvements” to it within 30 months of the date it receives the money.
- If substantial improvements have not yet been made within 30 months, working capital may count as qualified opportunity zone business property for up to 31 months if there is a written plan to invest the cash in an opportunity zone. The written plan is not filed anywhere but must be kept readily available in the event of an audit.
- You must report your deferred gain when the opportunity zone property is sold or exchanged, or by December 31, 2026 (whichever is earlier). See IRC § 1400Z-2(b)(1). To elect to defer your opportunity zone capital gains tax, make sure that Form 8949 is attached to your tax return in the year that the gain would otherwise have been recognized. Note that the Proposed Regulations permit a partnership to elect deferral under IRC § 1400Z-2 and if the partnership does not do so, the election may be made at the partner level.
Tax savings through opportunity zones in California
The California tax firm of Moskowitz, LLP is staffed by a diverse group of attorneys and accounting professionals who are ready to help you take greatest advantage of the new tax law. To learn more about to tax benefits of opportunity zone investment, contact our San Francisco office today.