The Code Section 1400Z-2 states such a requirement.
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Why can most QOF only accept deferred gain prior to Jan. 1, 2027?
What happens after that? Why can some accept it after that date?
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Technically a QOF could take on any investor dollars, but if an investor contributes deferred gains and other non-gain contributions, it dilutes the tax advantages. Therefore, a lot of funds are requiring only deferred gains are allowed in the QOF investment as it could create an accounting and tax headache for both fund manager and the CPA. The program to receive the 10-year ta- free appreciation ends on Dec. 31, 2026. That is the drop-dead date to realize a gain eligible for deferral. Any gain realized after Dec. 31, 2026, is not eligible for the 10-year tax-free appreciation.
That is because the deferral on such investments expires on Dec. 31, 2026. In other words, the original capital gain that was deferred by investing in an OZ fund will become taxable on Dec. 31, 2026, at the latest. Since Jan. 1, 2027, is after this date, it is not eligible for the deferral period since that is when the statute says the deferral expires.
The Internal Revenue Code and regulations set forth a definite life for the Opportunity Zone program. No election may be made with respect to any sale of exchange occurring after Dec. 31, 2026. The gain must be invested by the 180th day, which I believe is July 28, 2027. After that, the program expires unless extended by Congress. I suppose a fund could accept a gain after that, but you won't be entitled to any QOF tax benefits.
That is when the program sunsets, unless Congress extends it.
The law sunsets on that date. Historically, most laws that sunset are extended prior to the sunset date. But you should not count on an extension. Any investments made prior to that date will be able to utilize the provisions making a any gains tax free if the OZ investment was held more than 10 years. This tax free provision only lasts till 2047. Any appreciation after 2047 would be taxable. I hope we are all still alive in 2047.
I believe OZ designation ends at the end of 2026. Therefore, no OZ investment can be made after 2026.
Not sure what you mean by this. QOFs are legally allowed to accept money anytime, but the question is tax treatment. Some QOFs might be electing for Jan. 1, 2017, as a deadline because Dec. 31, 2026, is the date on which deferred capital gain must be recognized. But according to the proposed regulations, QOFs can accept investments of deferred capital gain up until June 30, 2027.
This is just driven by the statute and regulations. Technically, taxpayers can elect to defer qualifying gains recognized for tax purposes through Dec. 31, 2026. Therefore, depending on the type of gain and whether the gain was related to an asset held directly by the taxpayer, in which case the 180-day period begins on the date of sale/ tax reporting (unless it is an IRC Section 1231) or an asset that was held by an S corp, LLC/partnership, or non-grantor trust and reported on a K-1 (in which case the gain is generally reportable on Dec. 31, the start of the 180-day period). Therefore, some taxpayers will have until late June 2027 to reinvest and participate.
I believe cap gain can go into a QOF after Jan. 1, 2027, to maximize the benefits, though many are marketing to get the additional 10% to 15% reduction in the initial capital gain. That's not possible after Jan. 1, 2027. That said, no one should be doing an Opportunity Zone deal solely to get 10% to 15% reduction in capital gains taxation. The big benefit is the tax-free exit and whether the deal pencils out as profitable, absent the Opportunity Zone tax benefits.
The code provides that capital gains recognized through Dec. 31, 2026, are eligible to be invested in a QOF. Such gains would have to be timely invested in a within 180 days. So the last day a timely investment in a QOF could be made would be June 28, 2027. As you know, if a qualifying QOF investor holds its QOF interest for at least five years on or before Dec. 31, 2026, 10% of its roll-over gain is eliminated and if a qualifying QOF investor holds its interest for at least seven years on or before Dec. 31, 2026, another 5% of its roll-over gain (for a total of 15%) is eliminated. On Dec. 31, 2026, depending on how long the qualifying QOF investor held its QOF interest, it must recognize 100%, 90% or 85% of its roll-over gain. Any investment after 2019 is not eligible for the seven-year benefit and any investment after 2021 is not eligible for the seven-year or five-year benefits. The other benefit to QOZ investors is if a qualifying QOF investor holds interest in the QOF for at least 10 years and then it sells QOF interest, or the QOF sells its property and the QOF investor does not recognize any additional gain.
The program expires Dec. 31, 2026, and no gain deferrals are available after this date. As such, a gain incurred on Dec. 31, 2026, would be eligible for deferral during the 180-day period starting on such date. After this date, a QOF can still accept equity investments, but it will no longer be eligible for the step-up in basis after a 10-year hold.
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