James Saylor, BridgeTower Media Newswires
A significant but overlooked provision in the tax law passed last December is related to Opportunity Zones. This provision seemed to slip past most professionals and taxpayers alike last January as everyone was attempting to digest the many changes for both businesses and individuals. Like many sections of the new law, there has been some guidance issued by the IRS on these zones over the past few months, including some proposed regulations. These regulations still leave some ambiguity on the finer points, but did give taxpayers a decent road map of the rules related to this program.
The premise behind this new program is to increase investment in economically distressed areas, as defined by the government of each state. There are roughly 8,500 “Opportunity Zones” around the country including many in Monroe and surrounding counties. The program allows deferral of tax on capital gains that were recognized by a taxpayer if these gains are subsequently invested in an Opportunity Fund, which owns property in an Opportunity Zone. The amount of the benefit depends on how long the investment in the zone stays in place. The taxpayer can eliminate paying tax on a portion or all of the invested capital gain if the investment is held at least 5 years.
Although most people will immediately think these new zones are akin to the Empire Zone program or to 1031 (Like-Kind Exchange transactions) they are very different, the benefits are much less than under the Empire Zone program and much more lenient then the 1031 rules (although much less advantageous as well)
Some basic rules surrounding this program include:
• In order for a deferral of capital gain to take place, the investor must have a capital gain to invest. These capital gains can come from any source and do not need to be related to a business asset.
• Investment must happen with-in 180 days of the recognition of the capital gain. There is some more flexibility if the gain happens inside of a pass-through entity like an S-Corporation or Partnership the 180 days is measured from the end of the entity’s tax year.
• The investment must be made to a Qualified Opportunity Fund. These funds are easy to set up and can be any just about any entity that is created and organized in the United States. The Fund is required to hold 90% of its assets in Qualified Opportunity Zone Property, which is either tangible property, stock or a partnership interest of another Opportunity Fund.
• The investment must be made in new assets acquired after Dec. 31, 2017. The original use of the property must commence with the fund. If it is not original use property (for example an existing building is purchased), improvements to the building must be at least equal to the original purchase price.
• Deferral and elimination of the gains will be as follows:
• If investment is held for 5 years, 10% of the gain is eliminated;
• If investment is held for 7 years, 15% of the gain is eliminated; and
• If investment is held for 10 years, all of the gain is added to the basis of the investment — essentially eliminating the entire gain.
• Recognition of the gain will happen either when the property is sold or upon the expiration of the program (currently 2026 with special carve outs for investments taking advantage of the 10-year elimination period to extend this date).
This program will certainly be beneficial to some individuals and businesses that are able to comply with the rules and have capital gains to invest. However, this program is certainly far less advantageous than the old Empire Zones or Empowerment zones and is more along the lines of a like-kind-exchange, with the rules being much more flexible. Under the 1031 rules the gain is not permanently eliminated and is only deferred until the property is sold.
These rules are complex and any individual or business wishing to take advantage of them should consult with their tax advisor.
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James Saylor is a principal with Mengel, Metzger, Barr & Co. LLP. He can be reached at (585) 423-1860 or via email at jsaylor@mmb-co.com.
