There is no 10-year tax deferral. Are you referring to the seven year? If so, then yes, to take advantage of it. You need to deploy by the end of the year to get the full benefit, the extra 5% in step-up on your invested basis.
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Is there a deadline for when I need to deploy funds to benefit from the 10-year tax deferral?
Do all funds need to be deployed by Dec. 31, 2019 to qualify for the 10-year tax elimination? Are there any exceptions or gray areas that will allow funds to close in 2020 or 2021 and still get this benefit?
Answers
The short answer is no. The 10-year tax exemption is available to all investors who invest in a Qualified Opportunity Fund no later than Dec. 31, 2026. The Dec. 31, 2019, date pertains to investors who desire to take advantage of the full 15% step-up basis.
So long as you meet the qualifications, you should be fine.
The law sunset on Dec. 31, 2018. Unless the law is made permanent, an investment must be made prior to that date to get the 10-year tax deferral. To get step up in basis of 15% after seven years, you must invest by Dec. 31, 2019. To get the 10% basis step up after five years, you must invest by Dec. 31, 2021. To get the tax deferral until Dec. 31, 2026, you must invest prior to Dec. 31, 2016. Any time between now and Dec. 31, 2028, the law can be reaffirmed and become permanent. Under the current law, the step up to market value for fund investments held over 10 years ends on Dec. 31, 2047.
The deadline to deploy funds relates to whether fund has satisfied the asset-based requirements and/or the nonqualified financial property requirement relating to Opportunity Zone business entities. Generally speaking, to the extent a fund's activities are conducted through an Opportunity Zone business entity (which most funds are doing), you have 31 months to deploy capital pursuant to a written plan if you don't want the cash to be considered a bad asset for OZ purposes.
There are a few deadlines. First, the original capital gain must be reinvested into a Qualified Opportunity Zone (QOZ) within 180 days of the original tax gain being reportable. Second, once the QOF is formed and self-certified, the QOF must generally invest (includes simply dropping funds into a subsidiary entity) at least 90% of the funds into Qualified Opportunity Zone property by the first testing date. Third, under the new regulations an election can be made to ignore initial funding and defer the first testing date until the next six-month testing period. Fourth, if the QOF drops funds into a subsidiary entity (corp or partnership) then a period of up to 31 months begins to document working capital needs and developing a business plan to spend the funds on a real estate project or an operating business. 70% or more of the funds will need to be deployed by the end of the 31 months. Therefore, fully deploying 70% to 90% of the funds can take as long as 49 months in certain structures and fact patterns.
There is a 180-day requirement that must be adhered to. This depends on the timing of the gain event.
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