Within the Real Estate world, by now we know that the Tax Cuts and Jobs Act enacted a new opportunity to incentivize real estate investment and development in low-income communities across the country through Qualified Opportunity Zones (“QO Zones”).
These designated low-income housing income tracts in the United States (and Puerto Rico) allow investors who previously recognized a taxable gain to defer it by investing the gain proceeds into a Qualified Opportunity Fund (“QO Fund”).
Taxpayers with net capital gains on all 2018 sales of Section 1231 property (property used in a trade or business) or capital gains reported on a 2018 Schedule K-1, can defer these gains if invested in a QO Fund by no later than June 28, 2019.
Please note: The Sec. 1231 gain or capital gain is deferred until December 31, 2026 and taxed at the applicable federal rate enacted at that time. Furthermore, there is a 15% permanent exclusion of this gain if the investor holds the QO Fund for at least 7 years. Once the QO Fund investment is held for 10 years, any gains realized from any QO Fund are tax-free.
Illustrative Example:
Five individuals have identical interests in a Partnership. There are no other partners, and the Partnership’s taxable year is a calendar year. On January 17, 2018, the Partnership realizes a capital gain of $1000. The Partnership will report each partner’s distributive share of the capital gain on a Schedule K-1. Two of the partners, however, want to defer their allocable portions of that gain. The two partners can invest their allocable share of the gain (i.e. $200 each) in a QO Fund by no later than June 28, 2019.
Investing in a QO Fund can be truly beneficial to taxpayers who will see significant tax savings in the short and long term, however it is critical that you understand the nuances associated with this type of deferral. If you have not yet discussed this deferral and savings opportunities with a tax advisor, please reach out to Sax’s Real Estate Practice to address your specific circumstances at (973) 472-6250 or www.saxllp.com.
For more information, visit Sax LLP.
