Qualified Opportunity Zones: An Update
Hinckley Allen’s A Practical Guide to the Qualified Opportunity Zone Program and Qualified Opportunity Zones: Insights from the Government’s New Guidance detail a promising new program contained in the 2017 Tax Cuts and Jobs Act, that provides significant tax incentives for investors in Qualified Opportunity Zones (QOZs). Under the Program any person with a capital gain (not just from the sale of real estate) can invest the gain in an Opportunity Zone fund, and defer the tax on the gain until the earlier of: (i) the date on which the investment is sold or exchanged or (ii) December 31, 2026. In addition, 10% of the original gain will be forgiven for investments held for five years before December 31, 2026, and an additional 5% will be forgiven if held for seven years before December 31, 2016. Also, investors can pay no taxes on any increase in the value of their QOZ investments held for at least 10 years.
To maximize the tax benefits, investments in QOZs must be made before December 31, 2019.
Tax on the original gain, less amounts forgiven, come due after December 31, 2026.
The United States Department of the Treasury and the Internal Revenue Service (IRS) released their first set of QOZ proposed regulations on October 19, 2018, and the IRS held a hearing in Washington, DC on February 14, 2019 to obtain the public’s comments and recommendations. During that hearing, the IRS noted that it is continuing to work on a second set of QOZ proposed regulations. That process got delayed by the Government Shutdown in January but updated regulations are expected soon.
The first set of proposed regulations provide that until final rules are promulgated, eligible taxpayers may use the proposed regulations, provided that they are applied in their entirety and in a consistent manner.
On December 28, 2018, the ICSC submitted a comment letter to the Department of Treasury providing comments on the proposed regulations.
Also, the IRS recently updated its Opportunity Zones Frequently Asked Questions page, which now explains that if an eligible taxpayer sold stock for a gain in 2018 and invested in a Qualified Opportunity Fund, it can defer tax on the gain when filing a 2018 Federal Income Tax Return. An eligible taxpayer can also make an election on its 2017 Federal Income Tax Return by filing an amended 2017 return using Form 1040X and Form 8949.
Hinckley Allen will provide updates on the second and final set of QOZ proposed regulations as soon as those regulations are published.
As of the date of this update, most institutional investors are waiting on the sidelines until the regulations are finalized. Real estate entrepreneurs are teeing up opportunity zone deals to take advantage of the expected flood of money into QOZs between final regulations and December 31. Hinckley Allen is working with both developers and investors in taking advantage of the Program.
If you have any questions about the QOZ program, including about the proposed regulations, please contact Hinckley Allen’s Qualified Opportunity Zone interdisciplinary team:
- William S. Fish, Jr.
- Jeff Groshek
- Joseph A. Kuzneski
- Sarah M. Lombard
- John R. Pariseault
- John H. Sokul, Jr.
- Lisa M. DeFronzo
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