2019 Year-End Tax Guide

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

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For example, some cannabis investors were initially excited about the possibilities of rolling their capital gains into a cannabis business that was owned by a valid QOZF. Since the cannabis industry was not included on the original “sin” business list, there was initial optimism that was subsequently diminished when Treasury Secretary Mnuchin testified before Congress that cannabis businesses were not in the spirit of the law. The real estate side of Opportunity Zones has received most of the spotlight over the last two years. However, another possible opportunity that could generate higher yields under the Opportunity Zone program is often overlooked. That is the provision allowing for the deferral as well as the elimination of the capital gain on the upside when investing in a QOZB. Investing in a QOZB has its own set of rules but could provide a greater upside when compared to the real estate option. For example, what if Facebook were originally located within a QOZ when it went public? Could some of the early stage investors have potentially cashed out with a federal tax-free capital gain on sale? Similar situations are arising in markets such as San Jose, where buildings are being leased to “start ups” within the city’s QOZs, with the hope of luring these companies from Silicon Valley, which is just 20 minutes away. The other option for taxpayers to get involved with Opportunity Zones is through direct investment into managed funds. Most of the major brokerage houses and money center banks have established their own Opportunity Zone funds which allow taxpayers to rollover their capital gains directly. The funds are designed to provide some liquidity to taxpayers in late 2026, in order to pay the capital gains taxes that will be coming due. It is a perfect solution for taxpayers who do not want to manage their own QOZF and the burdens that come with it. The other issue to consider is the state tax treatment of a QOZF investment. Most states have conformed to the new federal law either fully or on a rolling scale. However, several states, including California, Massachusetts, Mississippi and North Carolina, have not yet conformed. Residents of these states will be required to pay state income tax on the gain portion that is being deferred for federal purposes.

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