For investors who reported significant capital gains on their 2018 K-1s or had capital gains from business and investment partnerships, there’s a way to potentially receive favorable tax advantages — both short- and long-term — on those profits. However, the deadline to defer payment of certain 2018 gains until 2026 — as well as the potential to reduce total tax liability on said gains by 15 percent if held for 7 years — is June 28.
Per Title 26 Internal Revenue Code 26 USC 1400Z-2, investors have 180 days to defer capital gains. For those with gains in 2018, June 28 (180 days from 12/31/18) is the deadline. Before this date, investors have the opportunity to reduce tax liability on realized capital gains from 2018 by investing those profits into a Qualified Opportunity Fund. These funds, in turn, invest in properties or businesses located within Opportunity Zones. If you are facing a stiff tax burden from capital gains in 2018, this is an opportunity to potentially reduce your tax liability.
What are Opportunity Zones?
An Opportunity Zone is an economically-distressed community (see also “low-income communities”) where new investments, under certain conditions, may be eligible for preferential tax treatment. The zones were created by the Tax Cuts and Jobs Act in December of 2017 to spur economic development in low-income, distressed urban and rural communities. While they were initially designated for parts of 18 states, Opportunity Zones have since been designated in parts of all 50 states, as well as five U.S. territories and the District of Columbia. Currently, there are more than 8,700 Qualified Opportunity Zones — investors can find a list of all designated zones at the U.S. Department of the Treasury’s Community Development Financial Institutions Fund website.
Why Invest in Opportunity Zones?
Opportunity Zones allow for a range of tax-deferred investments within their designated regions. Investors are not required to live within an opportunity zone or have a business located in one — they simply must invest in a Qualified Opportunity Zone Fund. These funds are structured as corporations or partnerships for the sole purpose of investing in Qualified Opportunity Zone properties, and 90 percent of its assets must be invested into properties or businesses within a zone.
These investments can provide three tiers of strategic benefits:
- Temporary tax deferral—Investors with capital gains realized in 2018 can defer paying taxes on those earning until December 31, 2026. These tax-deferred gains will be taxed at 2026 rates assuming full deferral.
- Step-up reduction—Taxpayers who reinvest capital gains into Opportunity Funds can receive a 10-percent reduction on their total tax liability if they hold the investment for at least five years, and a 15-percent reduction if they hold for a minimum of seven years.
- Permanent exclusion—Gains realized from appreciation on Opportunity Fund investments are fully excluded from taxation if the investment is held for a minimum of 10 years.
Investments can be made in real property, equipment, and infrastructure, or already operating businesses that lie within Opportunity Zones. Investors must invest through a Qualified Opportunity Fund rather than directly in these assets in order to qualify for the tax incentives.
Investments Could Reshape Economically Distressed Areas
It’s far too early to gauge how Opportunity Zone investments will impact or reshape thousands of downtown, industrial, urban and rural areas across the country. They have certainly created the potential for investors to deploy vast amounts of capital into low-income and economically distressed areas that too often get left behind.
It’s important to note that these investments still carry many of the same risks as other types of investments, including illiquidity, market loss, and business risk. Investors can learn more about the creation of Opportunity Zones and find additional resources at the Economic Innovation Group, a nonpartisan organization that spearheaded efforts to create the legislation that led to these unique investment opportunities.
Don’t let time slip away — the June 28 deadline is just around the corner.
Article originally posted on Benzinga.
Investing in real estate and Qualified Opportunity Funds (QOFs) involves significant risk and is suitable only for investors who have adequate financial means, desire a relatively long-term investment, who will not need immediate liquidity from their investment and can afford to lose their entire investment. Investors should review the private placement memorandum for any such investment in its entirety and should consult with their CPA or advisor(s) before investing. There are various risks associated with owning, financing, operating, and leasing commercial properties. If the tenant does not renew or extend the lease, or terminates or defaults on the lease, the operating results of the Property could be adversely affected by the loss of revenue. Other risks include potential environmental conditions at the property, changes in economic conditions, and changes in the investment climate for real estate investments. Furthermore, there is risk that the fund's Sponsor fails to comply to QOF regulations, resulting in the potential loss of the tax benefits that are offered through the Qualified Opportunity Zone Program.
Offers are made solely pursuant to the Confidential Private Placement Memorandum. Equity securities offered through WealthForge Securities, LLC, a registered broker/dealer and member of FINRA/SIPC("WealthForge"). WealthForge and Realized are not affiliated.