New Way to Defer Gains - Qualified Opportunity Zones

Red, white and blue america image with Tax Reform text on top. New way to defer tax gains.


RINA Alert — August 7, 2018 | Volume 16, Issue 1 | 800.756.2772

As part of the December 2017 Tax Cuts and Jobs Act - quietly inserted, was a complicated new tax break to lure dollars into struggling areas known as Opportunity Zones, which include much of Oakland, San Francisco, and rural areas of the East Bay. About 8,700 of these Zones exist nationwide currently. Taxpayers cannot contribute directly to these zones - instead taxpayers invest deferred gains from other activities into a fund.   

How does it work?

A taxpayer realizes a gain by selling appreciated property and within 180 days of the sale, the taxpayer invests the gain portion only, into a Qualified Opportunity Fund (QOF).  No tax is paid at this time on the gain and the investment in the QOF has a zero-tax basis. The gain is deferred until the sooner of, the taxpayer sells his interest in the QOF asset, or December 31, 2026. 

Tax Basis Increase

If the taxpayer holds their interest in the QOF for at least 5 years, they will receive a 10% tax basis increase in the investment in the QOF, if the taxpayer holds onto the investment for an additional 2 years, he will receive an additional 5% tax basis increase. For example, a taxpayer realizes a $1,000,000 gain on June 1, 2018, and invests the gain into a QOF. The taxpayer’s tax basis in his QOF investment on June 1, 2018 is zero. If the taxpayer holds his investment in the QOF until December 31, 2026 the taxpayer will be required to pay tax on a gain of $850,000.  

Gain Exclusion

If the taxpayer holds their investment in the QOF for 10 years, the tax basis in the investment in the QOF is deemed to be FMV. In the example above, the taxpayer sells the investment in the QOF at December 31, 2019 for $3,000,000. The taxpayer has already recognized and paid a tax of $850,000. The appreciation from $1,000,000 to $3,000,000 or $2,000,000 is permanently excluded from tax. 

The funds have freedom of what they can invest in, from real estate to starts-ups as long as they are not considered "vice" businesses (massage parlors, liquor stores, tanning booths, etc.) and if 90% of the assets are located in an Opportunity Zone.  The QOF must be for first use property - so businesses already located in the Zone may not benefit, but the incentive is to get new businesses to move and develop in these zones.

If you would like more information, please contact your RINA representative.

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