The opportunity zone (OZ) program, ushered in as part of the 2017 Tax Cut and Jobs Act, includes one of the most powerful and flexible tax planning provisions in decades. The program allows taxpayers who are generating capital gains from real estate sales, stock sales, artwork, Bitcoin, vehicles, intangibles and most other assets to roll over all or a portion of the gain into a Qualified Opportunity Fund (QOF) and achieve the following benefits:
1. Defer reporting the initial tax gain until December 2026.
2. Earn a 10 percent tax basis increase in their QOF investment in year five and another 5 percent increase in year seven — resulting in a permanent tax reduction.
3. Most importantly, gains accruing after the investment into the QOF will be 100 percent tax-free upon sale if the investment is held for at least 10 years.
The challenge for many is to roll those gains within 180 days from when the tax gain is reportable. As a result, action must be taken no later than June 28, 2019, to participate in the OZ program for any eligible calendar 2018 tax gains.
Two important ways to participate while window of opportunity is still open
Even if a qualifying investor has filed their 2018 tax return, they still have time to invest all or a portion of their 2018 capital gains into a public QOF. Or they can set up their own QOF (especially if the tax gains are at least $500,000) and file an amended 2018 return so their taxable income can be reduced dollar-for-dollar.
The OZ program is the most powerful investment diversification tool I have seen in my four decades of practice. If you have any clients with a high concentration of wealth in a single asset, you should be educating them (and your team) on the power of the OZ program.
Keep an eye on costs
Taxpayers investing in opportunity zones via one of the numerous national or boutique investment firms must carefully review the offering agreements. Most QOFs impose an annual management fee of 1 to 2 percent (which will generally accumulate to 10 percent to 20 percent over the minimum life of these funds) on top of the typical 15 percent to 20 percent “carried interest” charge. These fees will further reduce the investors’ future return. Even with the highly beneficial tax structure for OZ investors, the fee structures in most public funds can present significant hurdles.
Be mindful of nonconforming states
Certain states have not yet adopted the OZ provisions, including California, Hawaii, Massachusetts, Mississippi, North Carolina and Pennsylvania. As a result, investors must also carefully evaluate where these funds are proposing to invest. A taxpayer living in a conforming OZ state might invest in a QOF that makes an investment in a nonconforming state and thereby trigger unintended state tax.
Eligible gains
Gains that still fall within the 180-day reinvestment window include any gross capital gains that were reported on a Partnership, S corp or non-grantor trust equity holder’s K-1 or net Section 1231 (assets used in a trade or business) gains and losses reportable from calendar year 2018. The 180-day reinvestment timeline differs for direct sales from a taxpayer’s investment portfolio or grantor trust.
The flexibility of the OZ program is pretty amazing. Investors with large 2018 gains should carefully consider setting up their own OZ fund by June 28. Many investors think they need to start a project by June 28. In reality, they just have to move their gains to a QOF by June 28. Doing so gives the investor at least 31 months to decide the specifics of their future investment.
Taxpayers who miss the 2018 deadline will have other opportunities for post-2018 capital gains since the OZ program currently allows reinvestments until at least mid-2027. For more information, visit
