At this point, you may have heard about investing in Opportunity Zones (OZ). We're excited to share some highlights about new information recently released. On October 19, the Department of Treasury published proposed regulations answering many of the questions we had when OZ's were first introduced in the Tax Cuts and Jobs Act. The points below are an overview.
Opportunity Zone Overview
An Opportunity Zone is a geographic zone that is economically depressed and qualified as such by the state's governor and IRS. Taxpayers can defer the taxes they would ordinarily pay on capital gains by reinvesting those gains in a Qualified Opportunity Zone Fund (QOF). The longer the investment remains in an Opportunity Zone, the greater the benefit received.
- Gains are invested in the QOF within 180 days.
- There is an initial tax deferral of capital gain tax, so the investment basis is initially zero.
- Holding the investment for five years will result in a 10% increase in the investment's basis.
- Holding the investment for an additional two years (total of seven years) will see an additional 5% increase in the investment's basis (total of 15%).
- At the earlier the date of sale of the OZ investment or 12/31/2026, the initial deferral ends, and tax is due on the initial investment amount that has not received the basis step up.
- Holding the investment for a total of ten years will exclude all gains on the appreciation of the initial investment until 12/31/2047 (new). This is accomplished through the investment receiving a step-up in basis equal to the fair market value at the date of sale or at 12/31/2047.
- There is self-certification to meet a 90% Asset Test. This is done via Form 8996, which has been drafted as of 10/19/18. The self-certification is done annually.
- To meet this test, 90% of your total assets must be held in Opportunity Zone Property.
- The test is performed twice per year: 6 months after the taxpayers beginning of the year and again at the taxpayer's year-end (i.e., June 30th and December 31st for a Calendar Year taxpayer).
- New. Additional guidance if your year starts after 1/1.
- New. Cash under a working capital plan exclusion to the 90% test.
- Both individuals and entities are eligible to defer gains into a Qualified Opportunity Fund (QOF).
- New. Only capital gains qualify for deferral.
- New. An existing entity (partnership or corporation) can be utilized as a QOF.
- If you invest your deferred gains into an existing building located in an Opportunity Zone, you must substantially improve the property within 30 months of your investment. New. The substantially improve term does not include the land basis in the calculation.
- New. If a partnership opts not to defer their capital gain, the partner still has the option to defer their share of gain at the individual level.
The IRS has said more proposed regulations are in the works and will be published later in the year. Additionally, a public hearing is scheduled for January 10, 2019. We will keep you updated as soon as we learn more. If you have questions for Delap, please do not hesitate to give us a call at (503) 697-4118 or contact us online. Our experts would be more than happy to talk to you.