The Tax Cuts and Jobs Act of 2017 added Opportunity Zones to the tax code as a tool to spur economic development in distressed communities across all 50 states, the District of Columbia and five U.S. territories. Upstate New York has multiple zones to invest in and save taxes in.
Under the new law, new investments into these areas are eligible for preferential tax treatment.
An investor, who has recently realized a capital gain on a previous sale, can take those monies and invest in a Qualified Opportunity Fund, either by themselves or with other investors. Those investments would be used to purchase qualified real estate or businesses in the zones.
If the investment was held, the tax on the original capital gain would be deferred until it was sold (no later than 2026) and a 10-15% reduction in the original gain would also be received. In addition, if the qualified investment is held for 10 years or more, then the appreciation of that investment (real estate or active business) would be completely tax free!
There are, of course, lots of rules and requirements in order to obtain this great result.
The U.S. Treasury has issued two sets of proposed regulations to clarify the treatment of how to proceed. (Proposed Regulations Section 1.1400Z2).
The first set of proposed regulations was issued in October 2018 and covered the general treatment of the Qualified Opportunity Zones.
A second set of proposed regulations was released in April 2019 and gave us more details on the required investments.
Finally, a third set of proposed regulations is still to come, which will provide answers to specific questions previously raised.
These regulations include requirements on new vs. redeveloped real estate, designation as a qualified opportunity business and testing safe-harbor levels.
There will certainly be challenges and restrictions; however, there are great benefits to investing in a Qualified Opportunity Fund as well, including:
- Tax deferrals for 7 years;
- Tax reductions after 5 years; and
- Tax elimination after 10 years.
If you are looking to invest in a Qualified Opportunity Fund as part of your tax saving strategy, be sure to consult with your tax or financial advisor first.
Joseph A. Hardick, CPA, CCIFP, is a tax partner with Dannible & McKee, LLP, a Syracuse, New York based public accounting firm. For more information on this topic, you may contact Joe at (315) 472-9127 or jhardick@dmcpas.com. To learn more about Dannible & McKee, visit www.dmcpas.com.
