September 17, 2019
Connect Media frequently taps into the expertise of Marc Weider, co-leader of Anchin Block & Anchin LLP’s Real Estate Group, of all things Opportunity Zone. With another O-zone deadline looming (this one at the end of 2019), Connect Media asked Weider what investors need to consider when pondering the calendar, as well as the current state of Opportunity Zone investments.
Q. Can you go into detail about the upcoming deadline for investment? What do potential investors need to know about this, and how does it differ from the late June 2019 deadline?
A. The June 28, 2019 deadline was for those who had a 2018 gain they wanted to defer the tax on through an investment in an Opportunity Zone investment. Those potential investors needed to invest that gain money in a Qualified Opportunity Zone Fund (QOF), then have 180 days from the investment date to invest in a Qualified Opportunity Zone Business. This put them closer to Dec. 31, 2019. If an investor invests a capital gain in a QOF, which, in turn, invests in a QOZB, he or she can defer the tax on that capital gain until 2026, provided the investment is held through 2026. If the investor holds the opportunity zone investment for seven years through 2026, he or she will pay tax on only 85% of that gain. If that investment is held for five years — by 2026 — they’ll pay tax on 90% of the gain. So, to reap the maximum benefit from the program (paying 85% versus 90% on a gain), investors must make their Opportunity Zone investments by Dec. 31, 2019.
Q. What is the importance of this deadline from a real estate standpoint? Along those lines, are you seeing much Opportunity Zone investment?
A. We may likely see a ramp-up in real estate sales activity by the end of the year from QOF investors looking for good deals in a zone. Having said that, so far, we haven’t seen a lot of transaction activity in the Opportunity Zones. It doesn’t seem that the program is getting the amount of traction you would have imagined. For 2019 gains, you still have some time, and we expect to see more action in 2020 from these gains. If a 2019 gain comes from a flow-through entity (partnership, LLC or S-Corp), and the entity does not elect to defer the gain, the investor can invest his/her share of the gain into a QOF, either within 180 days from the date the entity recognized its gain or 180 days from 12/31/19. Therefore, we might not see much activity as it relates to 2019 gains until well into 2020.
Q. More guidance is due to come out shortly. What are some issues that still need to be addressed?
A. There is still some confusion as to whether an investor can exclude his/her gain, after holding a QOF investment for at least 10 years. For example, the regulations state that if a QOF sells an asset, and the investor has held their investment for at least 10 years, the investor can exclude his/her gain from being taxed. The investor would have put his/her gain money into a QOF, which then invested in a Qualified Opportunity Zone Business. The question, however, is whether the QOZB is selling the asset, rather than the QOF. And, depending on that answer, will THAT gain be excluded from taxation?
Also, additional regulations and/or clarifications are needed to focus on what happens if a QOF holds more than one asset, but sells only one asset. If that happens, do you have to step-up all the assets at that time, and, in turn, lose some of the benefits from appreciation of the remaining assets in the portfolio, from the tie of the first sale, to the date the other assets are sold? This also needs to be answered.
For comments, questions or concerns, please contact Amy Sorter
Tags: Opportunity Zones