Have you heard about the new way to eliminate capital gains taxes while helping under-served communities revitalize? It’s called the Qualified Opportunity Zone (OZ) program.
What is the Opportunity Zone Program?
Policy makers conceived of the OZ program as a win-win proposition that would give individuals and businesses a way to reduce tax burdens while helping to revitalize traditionally under-served communities. The program is a good substitute for like-kind exchanges that the Tax Cuts and Jobs Act rendered moot. The plan includes provisions for real estate investment and local business employment. Investors who keep their money in the program for a strategic number of years can completely eradicate their tax burdens on capital gains.
The Qualified Opportunity Zone program is codified under IRC §199A.
Updated Regulations for the Opportunity Zone Program?
The OZ program is new, so policy makers are still massaging out the kinks. To that end, they recently released more guidance regarding participation parameters.
The role of bridge-capital investors was murky when lawmakers first announced the program. People also wondered if the IRS would treat cash contributions differently than property investment deals.
Here’s what we now know:
- Under the new regulations, valuation assessments involving OZ investment interests tied to property will depend on whether the acquisition was a taxable or non-taxable event.
- The IRS will asses property interests at the fair market value, and gains that arise from such assessments will not be eligible for OZ deferral.
- For OZ investments made via non-recognition transactions (i.e., a transaction that doesn’t carry any tax burden) the assessed eligible amount will be:
- “the lesser of the adjusted basis of the property contributed,” or
- the fair market value of the investment received.
If the fair market value is more than the investor’s adjusted basis, the difference isn’t eligible for tax benefits derived from the OZ program.
- Prior to 2019, OZ investors had to establish projects for each entity. Proposed regulations now allow fund managers to operate several investment projects from one master fund.
- The recently clarified rules also allow fund managers and bridge-capital investors more flexibility, giving them leeway to manage dispositions (i.e., asset sales) without involving the shareholder. This opens the door for innovative new financial products that leverage the OZ program.
- If you use distributed debt to finance a project, then the proceeds can be taxable.
How Can You Use the Opportunity Zone Program to Reduce Taxes?
Parties that remain invested in the OZ program long enough can eradicate certain tax burdens. To determine how, consult a tax attorney. Since every situation is different, it’s best to sit down with a professional who understands all the ins-and-outs and how you can best use the program based on your finances.
Note: To avoid money laundering schemes, investors must wait 180 days to reinvest gains. Taxpayers can start Opportunity Zone funds or join established projects.
Connect with an Opportunity Zone Investment Attorney
Are you interested in learning more about the Opportunity Zone program and how it could lower your tax responsibilities? Let’s talk. Our team of accountants and attorneys understands the legislation and how to use it to your advantage. Get in touch today. Let’s discuss your options.