If you’ve learned anything at all about the Qualified Opportunity Zone (QOZ) program from previous blogs, it’s that the initiative contains many deadlines. These requirements must be met, to ensure tax deferrals on capital gains from the sale of assets. One such deadline is the 180-day requirement for reinvestment of your capital gains into a Qualified Opportunity Fund (QOF), to postpone taxes. The fund then takes that gain, and gains from other investors, and puts them toward Qualified Opportunity Zone Properties (QOZPs).
The final round of program guidance, released in December 2019, provided investors and QOF managers with enough of a foundation to begin QOZ work in earnest.
Then came March, 2020, the coronavirus pandemic, and the ensuing downturn.
During economic recessions, investments can come to a grinding halt; QOZ investments weren’t much different. QOFs pulled back on acquisitions, outlays, and redevelopments, as available property fell. In some cases, the pullback placed investors in jeopardy of violating the 180-day deadline requirement.
The good news is that the IRS issued its Notice 2020-39, which postponed the mandatory reinvestment date to the end of the year. The Notice provided additional extensions for QOFs, as well. While the postponements provided a much-needed respite, they are temporary. Once the calendar page flips to Jan. 1, 2021, the mandates will revert back to normal.
Resetting the 180-day clock
When you sell a property, your (hoped-for) profit is called a “recognized capital gain,” in accounting language. And, when you find a QOF in which to invest, you need to trust that the fund’s manager will do everything in its power to secure and improve the right property, to help avoid penalties.
Thanks to Notice 2020-39, if your recognized gain occurred any time between April 1, 2020 and Dec. 31, 2020, you have until the last day of this year to find, and invest, in a QOF -- or to set up such a fund, yourself.
Now, moving off track for a moment, in learning about capital gains, you could run across something called Section 1231 rules. When real property, or depreciable business property is sold for more than its current tax basis, that is considered a capital gain. If you held that property for longer than a year before it was sold, it falls under Section 1231 rules; The profit is taxed at the lower-rate capital gains, rather than the higher-rate of ordinary income.
But what if you exchanged or sold property on which you took depreciation deductions -- in other words, any depreciable real estate or similar property? This falls under another rule, known as Section 1250. Section 1250 states that any realized gain from the sale of your depreciable property could be taxed as high as 25%, due to depreciation recapture.
The good news about investing in a QOF is you can defer taxes that might be levied on gains from Section 1231 or Section 1250 rules -- as long as you reinvest those gains by the end of 2020.
The New Year is just around the corner
If you are still sitting on gains from the sale of an asset, and want to defer taxes on it, it’s a good idea to find, and invest in, the QOF as soon as you can. It’s important to find Qualified Opportunity Funds that 1) have at least 90% of their assets in a Qualified Opportunity Zone, and 2) have a plan to ensure substantial improvement of those assets. IRS Notice 2020-39 has provided some leeway on the asset test and substantial improvement requirements, as it has on the 180-day mandate. That leeway, however, will be coming to an end on Jan. 1.
Understanding deadlines and timelines are important to ensure you aren’t surprised with tax penalties. As such, conducting due diligence on potential QOFs is essential, as you determine where to park your capital gains.
To learn more about how you can defer capital gains taxes by investing in Qualified Opportunity Zones, contact Realized Holdings at www.realizedholdings.com, or call (877) 797-1031.
There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation.
This is not a solicitation or an offer to sell any securities. There is no guarantee that the investment objectives of any particular program will be achieved.