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Thinking About Opportunity Zones Investing? You Need To Know This 180-Day Time Frame

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Reinvestment Requirements In Opportunity Zones In 180 Days

If you wish to utilize the substantial benefits of the OZ program, meeting the initial investment deadlines is vital.  Timing is everything.

According Accountingtoday.com Opportunity Zones (OZ) offers qualifying taxpayers with capital gains income an opportunity to eliminate a portion and defer a large part of their federal gain and possible also, their state gain.

What Is A Qualified Opportunity Fund (QOF)?

It is any investment vehicle organized as a corporation or partnership with the sole aim to invest in a qualified opportunity zone property, which is not another qualified opportunity fund, which holds at least 90% of its assets in qualified opportunity zone property.

 

 

 

The Nine Percent Rule 

The 90 percent average is determined by the average of the percentage of qualified opportunity zone property held in the fund measured on the last day of the first six month period of the taxable year of the fund and the last day of the taxable year of the fund.

Must Be Equity Interest

In terms of proposed regulations, the investment in a QOF must be equity interest into a C Corp (including regulated investment companies and real estate investment trusts) or S Corp stock, a partnership, or other pass-through entity.  It can include preferred stock and partnership interests with special allocations.

The equity can be used for collateral for a loan. Investments made in convertible debt or amounts treated as debt under IRC Section 1275(a)(1) and Treasury Regulation 1.1275(d) do not qualify for QOZ deferral.

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180 Days Reinvestment Period

A QOF must be established within a 180-day window a and the day of the sale or the recognition thereof falls within this period.  It is specifically stated in the statute that we are dealing with 180-calender days and not six months.  The required concentration on counting accurately must be handled with precautiously: make your investment well-before the 180-days deadline to be safe.

The First Day

Described in IRC Section 1400Z-2(a)(1)(A), the first day of the period begins the day the deferred gain is recognized for federal tax purposes, disregarding the OZ deferral election until 2026. Installment sale structuring and like-kind exchanges can provide more time for investors who wish to postpone the beginning of the 180-day countdown. Keep in mind, however, that if you defer gains too far forward, you might not be able to generate a qualified capital gain before the termination of the investment phase of the OZ program on December 31st 2026.

Partnership And LLC Members

Partnerships and other pass-through entities can defer gains at the partnership level, and this means the 180-days countdown is postponed as well.  If the partnership does not make the selection, the individual partners can still elect to make an OZ reinvestment.

Moreover, partners and LLC members get additional time to make their choice since they are not considered to have recognized capital gains before the last day of their tax year, which is not before December 31st for most calendar-year entities.

The option remains available to taxpayers to recognize the gain on the same day as the asset sale happened and to have the 180-day countdown start on the same to accelerate the investment window.

Those who defer gains into a QOF and invest their entire interest into a QOF can make further QZ deferrals into another QOF within 180-days.

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How To Defer Capital Gain Deferral

Taxpayers need to attach IRS Form 8949 to their tax return, which would have reported the qualifying gain for the year of the deferral.

With many deferral elections, the capital gain can be divided into different  QOFs. It is recommended that you use a different  QOF for every underlying investment.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Contact us for more info about tax strategies for Real Estate Investments. 

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