2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

OPPORTUNITY ZONES: A YEAR LATER!

One of the last provisions tucked into the 2017 Tax Cut and Jobs Act (“TCJA”) was IRC Section 1400Z, which created the federal Opportunity Zones. There are approximately 8,700 census tracts approved by the Treasury within the USA, including Washington, DC, and Puerto Rico. The primary incentive behind Opportunity Zones is to drive investment in America’s low income

n Treasury released two sets of proposed regulations following passage of the TCJA. The first set, released in October 2018, was very taxpayer-friendly and included the following provisions, among others: Flow-through entities’ 180 day deferral period begins with the entity’s tax year– end, for capital gains from non-business assets. n If a QOZF investment is sold, the taxpayer has another 180-day period to roll over those proceeds into a new QOZF. n Working Capital “Safe Harbor” is 31 months for a Qualified Opportunity Zone Business (“QOZB”) to deploy the capital. n Substantial improvements for non-original use property for QOZ property must be completed within 30 months. The second set of proposed regulations was released in May 2019 to amend language which was keeping significant capital on the sidelines. The main provisions are as follows: n Debt financed distributions are allowed if there is basis and the transaction is not a disguised sale. n Working capital safe harbor can be extended if delay is caused by a government agency. n A building that has been vacant for five years or more is considered Original Use Property. Many of Marcum’s real estate clients, which include developers, private equity and hedge funds, have invested in projects located in Opportunity Zones, and with the release of the second set of regulations, capital continues to flow into these projects.

communities by providing (1) deferral of current capital gains taxes, (2) a reduction in the amount that would

be taxable as a capital gain if certain holding periods are satisfied, and (3) elimination of

capital gains taxes for any gains realized above the original invested amounts, if held for at least 10 years. Most taxpayers concentrated on the other major provisions of the TCJA, such as tax cuts and state tax deduction limitations. However, after the dust settled and once the act passed, taxpayers started to dig deeper for ways to maximize benefits , including Opportunity Zones. To qualify, a taxpayer must roll over a capital gain into a Qualified Opportunity Zone Fund “(QOZF”) within 180 days of the capital gain being triggered. If the deferred gain within the rolled over investment is held for five years in the QOZF, taxpayers are entitled to a 10% reduction in the capital gain rate (through increased basis). If the QOZF is held for seven years, there will be a 15% reduction in the capital gain tax. The most interesting part of the Opportunity Zones provision calls for a 100% gain exclusion on the upside value if a QOZF investment is held for 10 years. Regardless, the roll over gain into a QOZF will be taxed on December 31, 2026, unless it is sold earlier.

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