General rule is 180 days from recognition of gain date. If the gain was recognized in a pass through or it is 1231 gain, there is additional time.
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How much of a rush should I be in to invest in an OZ?
I’ve heard I need to invest quickly to maximize my benefits. Is that the case? Could I miss the boat if I wait too long?
Answers
Well, you can only invest with capital gains. And you lose some of the benefits if you wait until next year.
There's a 180-day timer you need to be concerned about, so you can't wait too long or else your investment won't qualify for tax benefits.
Generally speaking you will want to invest by Dec. 31, 2019, to realize the maiximum benefits. Taxpayers can still realize OZ benefits if invested after Dec. 31, 2019.
The ability to obtain the tax benefits exists only if the investment is made within 180 days of the when the capital gain triggering event occurs or 180 days of year end with respect to K-1 or Section 1231 property. Beyond those windows, the ability to get any of the normal tax benefits for an Opportunity Zone investment does not exist.
How quickly you invest is dependent upon the timing of your capital gains. It is true that 2019 is the magical year. To get the full 15% reduction in the capital gains, you will need to invest in 2019. However, the 10% reduction would still be available, as is the tax-free gain on the investment after 10 years. It's probably not worth making a bad investment just to get the extra 5% reduction in capital gains.
You will want to invest by Dec. 31, 2019, to get the full 15% tax step-up in your basis in the OZ fund. If you invest in January or later, your OZ fund step-up will cap at 10% vs. 15%.
It is true that to obtain the whole benefits provided you must invest on or before Dec. 31, 2019, to meet the at least seven years investment, but careful analysis must be performed before rushing. The amont of at least seven years will give you an additional 5% exclusion, but do not lose perspective of the at least 10 years benefit: 100% exclusion of the increase in value of the investment.
To get the full 15% elimination of gain invested in a QOF, you must have the gain in 2019. Then elimination drops to 10% if you have the gain in 2020.
OZ benefits are available to individuals who invest by 2026. That said, the value of the deferral and the opportunity for a 10% or 15% reduction on the tax paid on deferred gain does diminish over time. A quick breakdown: One, any OZ investment made in 2019 would be eligible for deferral of capital gain until 2026 (seven-year deferral) and a 15% discount on tax paid on the initial investment. Two, any investment made in 2020-2021 would be eligible for deferral of capital gain until 2026 (five- or six-year deferral) and a 10% discount on tax paid on the initial investment. Three, any investment made in 2022-2026 would be eligible for deferral of capital gain until 2026 (zero- to four-year deferral), but not discoint on the tax paid on the initial investment. All of the above investments are eligible for the step-up in basis after a 10+ year hold, so long as that election is made before the expiration of the benefits at the end of the 2047. In summary, 2019 is the best time to make an OZ investment in order to maximize the value of the deferral and tax reduction, but there is still significant potential value for OZ investments made in years to come.
If you invest before the end of 2019 you will be able to enjoy all of the benefits of the OZ program. After this year, you will be unable to get some of the reductions in your original gain that you get for holding an investment for more than seven years before Dec. 31, 2026, but that is a small loss and the significant benefits (i.e., capital gains deferrals unit Dec. 31, 2026 and the exclusion from tax of gains from sales after 10 years).
There are a lot of timetables, and it would make far more sense for you to read one of the dozens and dozens of summaries produced by law and accounting firms than to recreate all the rules and the exceptions to the rules here. In the very briefest of summaries, you must first form a Qualified Opportunity Fund (or invest in someone else's). In general, you have a total of 180 days to make that investment, with the 180-day period running from and including: the day of the sale that generated your capital gain, in the case of capital gains that arise from sales of capital assets, most typically sales of stock; or Dec. 31 of the year of sale (presuming that you are a calendar year taxpayer) in the case of Section 1231 gains that arise from the sale of property used in a trade or business, like a sale of rental real estate or a patent or trademark. Having gotten your investment, the fund has testing dates by which it must then invest in assets or businesses. These testing dates may mean that the fund can sit with cash for as long as a year (although shorter periods are more likely, and during this period, the cash must be invested in certain cash-like assets), and companies in which the fund invests may have 31 months (or in some cases longer) to develop actual properties or businesses. Everything I have described here has exceptions, and fine tuning, so don’t assume that you fit within the timeframes here, or that you might not have to examine your specific question more closely. For example, investments made before the end of 2019 generally qualify for a 5% better tax break than investments made in 2020. And special timing rules apply to investments made by partnerships or LLCs that have capital gains. Finally, many of these rules are the subject of the IRS' "proposed regulations" which may be changed. The IRS has received more than 300 comment letters suggesting changes to many of its rules, including these timetables.
If you have realized gains to invest in an OZ, the sooner you fund your QOF, the sooner your 10-year timeline starts. What is time sensitive is that, as things stand now, any funds invested in a QOF after Dec. 31, 2019, will only realize a maximum 10% reduction in their taxes due at Dec. 31, 2026. Investments in a QOF after Dec. 31, 2019, will not have the ability to be held seven years before the deferral deadline that would increase the tax reduction from 10% to 15%. Once the funds are invested in the QOF, you have time to invest the QOF funds into OZ investments. As a result, there is no rush to invest in an OZ investment until you find a suitable opportunity you like. However, you must get the gains into the QOF within the 180 days after realization.
The optimal time to invest is in 2019, as the deferral is through 2025 and tax due on the deferral in 2016. So each year brings less benefit on the deferral side.
The Opportunity Zone program requires investors with eligible capital gains to reinvest them in a Qualified Opportunity Fund (QOF) within 180 days to qualify for the program. In addition, an investor would have to be invested in a QOF by the end of 2019 to maximize the tax exclusion offered by the program — a 15% tax break on the capital gains invested. The end of 2021 is the latest date in which an investor can invest in a QOF and be eligible for the next level of tax breaks, a 10% tax exclusion on the eligible capital gains that are invested in the QOF.
The current regulations require that to receive the 100% step-up basis on your investment, your funds must be invested by Dec. 31, 2019. There is proposed legislation to extend this date, but it hasn’t been passed yet. Under the current regulations, if you invest past that date, you won’t receive the full step up basis at the end of the investment.
There is a 180-day timeline that requires you invest that time period after the capital gain event. There are nuances for certain situations (i.e., partners in partnerships and net Section 1231 gains) whereby the 180 period does not start until after the end of the tax year during which a capital gain recognition event transpired.
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