The Qualified Opportunity Zone Program (QOZ Program) was created by Congress as part of the Tax Cuts and Jobs Act of 2017. The QOZ Program provides taxpayers who make a qualifying investment in a Qualified Opportunity Fund (QOF) with potential significant tax benefits. To qualify for these benefits, a taxpayer must first realize capital gains from selling property to an unrelated party and then roll such capital gain into a QOF by making a cash equity investment in the QOF within 180 days of the date when the capital gain was realized.
The potential tax benefits available to a taxpayer making a qualifying investment include:
- deferral of the realized capital gain until as late as December 31, 2026
- a reduction in such capital gain by 10 percent (if the investment is held 5 years prior to recognition) and an additional 5 percent (if the investment is held for 7 years prior to recognition), for a total maximum potential benefit of a 15 percent reduction in the deferred capital gain, and
- no capital gains tax on the appreciation of the taxpayer’s investment in the QOF if such investment is held by the taxpayer for 10 years or more.
As we enter December 2019, we near the first important investment date established by the QOZ Program – December 31, 2019. Under current law, only qualifying investments made in a QOF on or before December 31, 2019 will be eligible for the maximum 15 percent basis step-up (ie, 15 percent capital gain reduction); rollover of capital gains into a QOF made in 2020 or 2021 will qualify for a lesser 10 percent basis step-up (ie, 10 percent capital gain reduction).
Taxpayers who do not make a qualifying investment on or prior to December 31, 2019 will miss out on the potential maximum benefits currently available under the QOZ Program.
There is a second reason why taxpayers should consider December 31, 2019 as an important date for the QOZ Program. The 180-day investment period for a taxpayer who sold commercial real estate and other depreciable business property (classified as "Section 1231 property") at any time during 2019 begins December 31, 2019. December 31, 2019 is the only date in 2019 when a taxpayer who sold Section 1231 property in 2019 can invest in a QOF and get the benefit of the full 15 percent capital gain reduction. Similarly, a taxpayer who was a partner of a partnership or a shareholder of an S corporation that sold property during 2019 may (subject to various requirements) elect to treat December 31, 2019 as the first day of the partner's / shareholder's 180-day investment period for the partnership’s / S corporation's gain – which effectively gives the partner / shareholder a "second bite at the apple" to invest in a QOF in 2019 and take advantage of the full 15 percent capital gain reduction.
We encourage you to discuss this important date with your DLA Piper advisors as soon as possible so they can answer any questions you may have regarding the QOZ Program and enable you to make investment decisions prior to year-end.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.