Qualified Opportunity Zone Updates
In a previous version of our newsletter we discussed Opportunity Zone investments and the potential for tax savings by investors. Final guidance for these investments has arrived and below are some of the key points from the final regulations of Qualified Opportunity Zones (QOZ):
- Taxpayers no longer must wait until the end of the taxable year to reinvest gains arising from Section 1231 assets. Starting with the 2019 tax year, taxpayers have 180 days to reinvest gains into a QOF starting on the date of each individual sale. Section 1231 losses incurred are not considered and taxpayers are not limited by them. Several potential benefits arise from this:
- If Section 1231 gains are deferred into a QOF, any 1231 losses carried forward from the previous five years will not be recaptured in the year of gain.
- This allows you to increase the amount of gain you can defer that would have otherwise been limited by 1231 losses.
- Gain from installment sales may be deferred in the years proceeds are collected. The holding period may begin for each individual payment received or an election may be made to have the period begin on the last day of the year.
- Proceeds from assets sold to a QOF may not be reinvested into the QOF as eligible deferred gains.
- Partners or shareholders in passthrough entities that have eligible gain that has not already been deferred by the entity now have until the due date of the pass-through entity’s tax return for the 180-period to begin.
- Significant improvements do not have to be made to qualifying property if it has been vacant/unused for 3 or more of the previous years provided the property was vacant for three years after the surrounding area were designated as a QOZ. Further, had the property already been vacant for 3 years when it was designated as a QOZ, it only would have to be vacant for one more year after the designation to qualify. Although not requiring substantial improvement, the land must be used in active trade or business.
- The definition of substantial improvements has expanded to include the purchase of a separate property that satisfies the original use test so long as that property improves the functionality of the original property.
To reiterate, the changes noted above are now final and have been approved.
If you are considering investing into a QOF or QOZB, please reach out to your representative at DKC to ensure that all aspects of the sale and subsequent investment are considered before finalizing.