February 6, 2019
Even as billions pour into Opportunity Zone funds, misconceptions persist on what exactly the Opportunity Zone program entails. “It is a great program that should pull capital into under-invested areas,” said Darryl Jacobs, co-founder of law firm Ginsberg Jacobs in Chicago. “But to get the most out of the program, investors must do their due diligence.
“Deals still must pencil out,” he added. “Investors also need to make sure they understand the program’s rules, or they may fail to get the hoped-for tax deferrals or breaks or, even worse, face penalties.”
Jacobs cited—and corrected—five common misunderstandings about the Opportunity Zone program:
• All capital gains qualify. The gains must arise from a sale between Dec. 22, 2017 and Dec. 31, 2026, and must be invested in a Qualified Opportunity Fund (QOF) within 180 days of the gain recognition date.
Furthermore, “if you own a property in the Opportunity Zone, you can sell it to anyone, but not all buyers will be eligible for the tax advantages,” said Jacobs.
• Capital gains can be deployed at any time before 2027. In fact, a QOF must deploy 90% of its assets into eligible property within six months of the fund’s designation or Dec. 31 of the year in which the fund is formed, whichever comes first.
• All money in a QOF has to be invested in the Opportunity Zone. In fact, as little as 63% of the fund can be invested in qualifying assets, depending on how the fund is structured. That’s under the “70-30 rule” included in IRS guidelines issued last October.
• Any existing building in an Opportunity Zone qualifies. Properties must be newly- constructed or “significantly rehabbed” within 31 months. The property may be commercial or residential, but can’t be a “sin property,” such as a liquor store or massage parlor.
• Investors pay no taxes on capital gains after 10 years. Assuming the investor makes an investment in a QOF prior to Dec. 31, 2019, he or she is allowed to defer paying taxes on the original capital gain—i.e. the money invested into the QOF—until divestiture or Dec. 31, 2026, whichever occurs earlier. However, since the original gains are taxed no later than Dec. 31, 2026, an investor needs to invest gains no later than Dec. 31, 2019, to get the maximum tax benefit.
“The longer an investment is held, the more tax benefits the investor reaps,” said Jacobs. “And if they’re willing to commit a decade or more to a particular project, they are rewarded for the risk they take in the form of tax-free gains—but only if that project is successful.”
For comments, questions or concerns, please contact Paul Bubny