A cautionary tale of Opportunity Zone deferrals

August 27, 2019

By John Werlhof, CPA for The Tax Adviser

The law known at the Tax Cuts and Jobs Act, P.L. 115-97, added new provisions to encourage investment in economically depressed areas referred to here as opportunity zones — qualified opportunity funds (QOFs). These incentives include:

1. Capital gain reinvested in a QOF during a 180-day period is deferred until the earlier of:
a. The date on which the opportunity zone investment is sold or exchanged; or
b. Dec. 31, 2026 (Secs. 1400Z-2(a)(1)(A) and (B)).

2. Up to 15% of the deferred gain is permanently excluded from income if the opportunity zone investment is held for more than seven years (Secs. 1400Z-2(b)(2)(B)(iii) and (iv)). In other words, the investor will pay tax on only 85% of the deferred gain when that gain is eventually recognized.

3. Any post-investment appreciation in the QOF is permanently excluded from income if the investment is held at least 10 years (Secs. 1400Z-2(a)(1)(C) and 1400Z-2(c)).
The tax deferral and exclusion incentives are available only if gain is reinvested during a 180-day period. Gain invested before the 180-day period begins is not eligible for deferral.

Taxpayers may intuitively expect the 180-day period to begin on the day they receive the sale proceeds. In some cases, the 180-day period does not begin until the end of the tax year, requiring taxpayers to delay investing in an opportunity zone to benefit from the deferral. This article provides an overview of the rules for determining the 180-day period to qualify for the full benefits of a qualified opportunity zone investment.

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