Some say I need to invest by the end of this year, others say that the zones are working until 2047.
Both are true. Based on the ways the legislation is written, you have to invest in a QOF for seven years before the end of 2026 to get the full 15% step-up in basis. December 31, 2019 is the last day to invest and reach that seven-year hold by the end of 2026. There are still plenty of upsides in OZ investments after that date, but the max step-up in basis will be 10% rather than 15% starting in 2020.
The full benefit includes the elimination of 15% of the deferred gain. For this, you need to have the QOF investment for seven years by December 31, 2026. This requires an investment by the end of 2019.
The program or ability to invest does not end on December 31, 2019. If the investment is not done by December 31, you will, however, not receive the full tax benefit of the QOF. The final date of the QOF 2026.
The end of this year marks the last date on which investments can get a full 15% haircut on the deferred capital gain if they're held under Dec. 31, 2026. Theoretically, under the proposed regulations, June 30, 2027 is the very last date you can make a qualifying investment, but the logistics of making an investment after April 15, 2027 are a bit odd. Dec. 31, 2047 is the final date on which you can notch the tax-free exit under the proposed regulations, but even that might change when final regulations come out next month.
To get the 15% reduction in capital gains tax, the investment has to be held seven years. There are only seven years between the end of 2019 and 2026. You still can get a 10% reduction after 2019 and I don't think the 5% tax savings should drive an OZ investment decision. The program will be around a while and the back end benefits on sale after a 10-year hold is more compelling for tax benefits.
You don’t need to invest by Dec. 31, 2019 to get tax benefits of an Opportunity Zone fund. Here is the confusion. Any capital gain is deferred until Dec. 31, 2026. The deferred tax is payable on April 15. 2027. If you hold for seven years, 15% of the deferral would be tax-free. If you hold for five years, 10% of the deferral will be tax-free. If you invest after Dec. 31, 2019, only 10% of the deferral will be tax-free. By waiting till after Dec. 31, 2019, you lose 5% on the tax-free deferral. The real benefit is that any qualified investment held more than 10 years will be tax-free if you sell prior to 2047. If you sell after 2047, only the appreciation after 2047 will be taxable. I hope this helps with some of the confusion. Because gains through 2047 are tax-free, OZ investing can also be a great estate planning tool.
The primary benefits of the OZ program are a 10% step-up in basis after being invested for five years, a 15% step-up in basis after being invested for 10 years, and a 100% step-up in basis after being invested for 10 years. If you don’t invest by the end of 2019, the seven-year benefit goes away, but the five and 10-year step-ups remain.
Both are correct! The benefits of the program will last for quite some time before you must unwind/exit, but the highest step-up on your deferred gain could only have been realized by Dec. 31, 2019. After that date, the 7-year hold benefit was no longer available. The next drop-off point will be Dec. 31, 2021, where the 5-year benefit will also expire.
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