What happens with my investments when the Opportunity Zone program expires on Dec. 31, 2047?

Answers

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  Wendi Kotzen

  Ballard Spahr

  August 06, 2019

  In order to obtain the 10-year benefit, the basis step up to fair-market value after holding a qualifying QOF interest for at least 10 years, under the proposed regulations you must sell or exchange your interest in the QOF on or before Dec. 31, 2047, or the QOF must sell or exchange its interest in a QOZB in a transaction that produces capital gain on or before Dec. 31, 2047. The only part of the proposed regulations that taxpayers may not rely upon are those relating to the 10-year benefit. As a result, it is not clear precisely which types of sales or exchanges will enable a taxpayer to obtain the 10-year benefit other than a sale. For example, a tax-free transfer to a partnership technically is an exchange. However, we do not know if a taxpayer could transfer its qualifying QOF interest to a partnership after the taxpayer held that qualifying QOF interest for at least 10 years and get a step-up to fair-market value. We do know that as a general rule, a transfer of a qualifying QOF interest to an aggregator partnership is not an inclusion event that causes acceleration of the deferred gain but the IRS and Treasury have not explained how the inclusion event rules and the 10-year benefit rules work together. You will have to wait for further guidance from the IRS and Treasury to fully answer your question. You should discuss this issue with your accountants or legal advisors. As you know, the QOZ provisions of the Internal Revenue Code are very complicated and the complying with highly technical rules are key to obtaining the benefits.

• 

  Scott McIntosh

  Opportunity Zone Consulting Group

  August 06, 2019

  Dec. 31, 2047, is the last day an investor can sell the interest in a QOF and exercise an election to step up his basis in the investment to fair-market value at the time of sale. An investor who chooses to hold his interest in a QOF past Dec. 31 would forego the opportunity to exclude tax on any appreciation in the value of interest. Two, correct. QOF investments only receive tax benefits when they are made with capital gain equity eligible for deferral. Because that deferral period ends on Dec. 31, 2026, an investor must make a qualifying investment prior to then to be eligible for a tax-free sale after a 10-plus year hold.

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  Brad Cohen

  Jeffer Mangels Butler & Mitchell

  August 09, 2019

  Program sunsets Dec. 31, 2016. If you enter the program before that date, you are good until you sell.

• 

  John (Jack) Wegmann

  John Wegmann CPA

  August 10, 2019

  Your first question is, “What happens with my investments when the Opportunity Zone program expires on Dec. 31, 2047?” Under current law, if you have not disposed of your interest in a QOF by Dec. 31, 2047, you will not be eligible for the basis step-up at the time you do dispose of the QOF. However, since the entity will no longer be a QOF, I would argue that it will be eligible for a step-up in basis at the time of the owner’s death. They did consider user comments which suggested either allowing for a step up based on valuation or removing the time restriction, but determined that the first suggestion would be too subjective to allow and enforce and the second suggestion would be too onerous to administer. Your second question is, “How will the expiration of the Opportunity Zones designation impact existing investments?” The expiration of Opportunity Zone designations on Dec. 31, 2028 will not impact pre-existing investments in QOFs. Your third question is “I have also heard that QOF investments can only be made before Jan. 1, 2027. Why?" Incorrect. The latest gain subject to deferral would be on Dec. 31, 2026. As such, the last day of the 180-day period for investing that gain would be in late June 2027. Why? Because those are the dates set forth in the Internal Revenue Code and the regulations thereunder.

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  Matthew Rappaport

  Falcon Rappaport & Berkman

  August 07, 2019

  The expiration ought not to impact existing investments. The deadline for investment is based on the deadline to recognize deferred capital gain. As of now, based on the proposed regulations, any sale after Dec. 31, 2047 is not projected to qualify for tax benefits, though that may change upon finalization of the regulations.

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  Neil Faden

  Manatt, Phelps & Philips

  August 06, 2019

  Yes, investments need to be made on or before Dec. 31, 2026. That is what the statute requires. The regulations also make clear that the benefit of excluding gains taxes on investments only if they are sold by 2047. The reasoning is not super clear, but that's what it says.

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  Matt Campbell

  Hall Estill

  August 06, 2019

  Unless you dispose of the QOF interest before that time, you would lose out on the benefits of a tax-free exit on the sale of the QOF interest (including no depreciation recapture). The ability to sell a QOF interest after 10 years and up to this time period will prevent a dumping of QOF interests and property at inopportune times. This flexibility is welcome. I'm not aware that a QOF investment is prohibited after Jan. 1, 2027 but there could be no 15% reduction in the capital gain brought into an Opportunity Zone deal if waiting that long. To be candid, I've not looked at whether an investment cannot be made after Dec. 31, 2027. That's a lot of years between now and then to take advantage of this program.

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  Guy Nicio

  Windes

  August 06, 2019

  You still would have your investment, but you would lose the ability to exempt your gains (post investment appreciation) from federal tax unless the final regulations say otherwise (this is based on current "proposed" Treasury regulations). That is the date that the tax provision sunsets (ends). It is merely a matter of legislative process and tax law that dictates the date. There is no other reason.

• 

  Blake Christian

  HCVT CPAs

  August 06, 2019

  Actually, capital gain recognized through Dec. 31, 2026, (not 2027) are eligible for OZ investment. Dec. 31, 2026, is the date the deferred gain is reported. Therefore, that is also the deadline for participating in the OZ program. The deadline for disposing of the re-invested QOF or QOZ property and electing to exclude the gain ends on Dec. 31, 2046; therefore, the taxpayer must dispose of their investment prior to 2047.

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  Maria De Los Angeles Rivera

  Kevane Grant Thornton

  August 08, 2019

  If you keep the investment after 2047 you will not be able to elect the non-recognition of the gain on your investment. The investment must be done while the zone is designated as an Opportunity Zone, which is 10 years.

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