Commercial Investment Real Estate March/April 2019 | Page 34

Opportunity Zones
by Mark Lee Levine, CCIM, and Libbi Levine Segev
W
hile the tax benefits of Section 1031 exchanges
in commercial real estate are well-known to
most real estate professionals, the new qualified
opportunity zone program now offers another
approach to deferring or eliminating taxable gain.
The Tax Cuts and Jobs Act of 2017, code sections
1400Z-1 and 1400Z-2, created qualified opportunity
zones to encourage investment in specific economically
distressed areas across the U.S. This new type of invest-
ment allows taxpayers to defer or possibly exclude capital
gains from taxation.
The opportunity zone refers to investment in a quali-
fied opportunity fund, or QOF. Opportunity zone invest-
ing occurs within a fund that is qualified under the code
and regulations.
Qualified opportunity zone investments in commercial
property can be similar to 1031 exchanges, to defer taxes,
but the differences in tax implications can be significant
when there is a disposition of the property. The dispositions
might utilize an opportunity zone investment, an exchange,
or a sale. Although favorable tax benefits may be gener-
ated from dispositions that are followed by investments in
opportunity zone areas, this approach is only one option.
Taxpayers and advisers also should examine tax-deferred
exchanges, sales, and other approaches, rather than assum-
ing that an opportunity zone is the best alternative, even if
there are potential tax savings.
While this discussion focuses on real estate, related prin-
ciples and issues may be applicable to investments in quali-
fied opportunity zones in personal property as well. How-
ever, the federal tax law no longer allows 1031 tax deferral
for personal property; the exchange must involve real estate.
V
Laws dealing with opportunity zones are being devel-
oped. The lack of well-established case law, regulations,
and other guidance for investments in qualified opportunity
zones creates risks — risks that should be considered care-
fully before investing in opportunity zones.
Alternatives When Disposing of Real Estate
The 1031 exchange program provides for non-recognition of
gain or loss for exchanges of qualified, like-kind real estate.
The 1031 deferral does not apply if the property exchanged
is inventory property held for sale by the taxpayer.
Imagine that John owns Property X, and he is under-
taking an exchange with Jane for Property Y. This is not a
qualified 1031 tax-deferred exchange for John if he holds
Property X primarily for sale (dealer) or if he holds Property
Y primarily for sale.
An opportunity zone deferral also would not be appli-
cable if the property in question is held primarily for sale.
If the exchange was qualified under 1031, the 1031 law
allows for certain delays, such as a case where John will
transfer Property X (relinquished property) immediately,
but will receive the replacement property (Y), sometime in
the future, within specific time limits. Opportunity zone
rules also allow for a delay to invest funds in the qualified
opportunity zone.