Thanks to the Tax Cuts and Jobs Act, real estate investors who have capital gains income can benefit from tax incentives offered through the Qualified Opportunity Zone (QOZ) program. Investors can defer or even possibly eliminate a portion of their capital gains tax liability.
The QOZ program was created to spur economic development and job growth in low-income communities by encouraging investors to reinvest capital gains into Qualified Opportunity Funds (QOFs) that make investments into business or investment properties in these zones.
However, reinvestment of capital gains earned before January 1, 2027, is required within a 180-day window. Here’s what real estate investors should know about Qualified Opportunity Zones and the 180-day reinvestment period.
Capital gains that are eligible to be reinvested in a QOF must be made within 180 days of realizing those gains, which begins on the first day those capital gains were recognized for federal tax purposes. Depending on the source of the gains, recognition is defined by two types:
For taxpayers who recognize capital gains through a Schedule K-1, there’s the option to start the 180-day investment period on the following dates:
Once these gains are reinvested in a QOF, the Fund must invest 90% of its assets into the QOZ property. Failure to meet the requirements will result in tax penalties for the QOF.
There are two types of capital gains — short-term and long-term capital gains and both qualify for reinvestment in a QOF. Investors can defer gains on the sale of stocks, bonds, business sales, real estate, and other assets.
Keep in mind that capital gains recognized on the sale or exchange of property only qualify if the transaction is with an unrelated party. If the QOZ entities are partnerships for tax purposes, the parties will be considered related if they directly or indirectly own more than 20% of the capital interests or profit interests.
Investors can take advantage of one or more of the three following tax benefits by following QOZ investment guidelines:
If you’re thinking of reinvesting your realized gains into a QOZ, make sure you time it accordingly and follow the 180-day rule. By following the requirements, you can potentially defer, reduce, or be permanently excluded from capital gains tax liability.