a neW MeChanisM for gain deferral
Tax law Section
Chair: Christopher Dingman - Barnett, Bolt, Kirkwood, Long & Koche, P.A.
a taxpayer can sell
property of any type
and defer gain from
the sale by reinvesting
the gain in a “qualified
O
opportunity fund.”
ne of the more
exciting tax planning
opportunities made
available by the
passage of the 2017 Tax Cuts
and Jobs Act relates to the ability
to shield gain from the sale of
property by reinvesting proceeds
from such gain into what are
known as “qualified opportunity
zones,” which are low-income
communities designated by
each state.
Under Internal Revenue Code
§§ 1400Z-1 and 1400Z-2, a
taxpayer can sell property of
any type and defer gain from the
sale by reinvesting the gain in a
“qualified opportunity fund” within
180 days of the sale. A qualified
opportunity fund is a partnership
or corporation that invests 90
percent of its assets into a business
within a qualified opportunity
zone. Among other requirements,
at least 50 percent of the qualified
business’s total gross income must
be derived from the active conduct
of a qualified business (specific
businesses such as golf courses,
country clubs, massage parlors,
and racetracks are excluded).
By reinvesting the proceeds into
a qualified opportunity fund, a
taxpayer can defer gain until the
sooner of when its interest in the
qualified opportunity fund is sold
or December 31, 2026. In addition
to this general gain deferral, the tax
NOV - DEC 2018
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HCBA LAWYER
code provides that property that
is held for five years or seven years
will have a basis increase resulting
in a portion of the pre-rollover
gain being entirely excluded
(ten percent and an additional
five percent, respectively). As a
potentially even more dramatic
benefit, property held within a
qualified opportunity fund for ten
years will have its basis increased
to its fair market value at the time
of ultimate sale (meaning that
gains within the opportunity fund
would be excluded from income).
So where do we go from here?
Congress has provided a significant
tax benefit intended to encourage
investment in low-income commu -
nities, and several areas within
Hillsborough County have been
designated as qualified opportunity
zones. Still, commenters note
several open items that will need
to be resolved before taxpayers
en masse feel comfortable taking
advantage of the provision.
Among those items that remain
unresolved (as of the date of this
writing) and may reasonably
delay a taxpayer’s desire to deploy
capital for purposes of taking
advantage of the new provisions,
taxpayers will need clarity as to:
(a) whether depreciation recapture,
which recasts certain capital gains
as ordinary income to the extent
previously depreciated would be
eligible for exclusion; (b) given
that the applicable statute directs
that “substantially all” of a
business’s tangible property must
be “opportunity zone business
property,” what proportion satisfies
the “substantially all” requirement;
and (c) whether residential rental
property qualifies as an
opportunity zone business.
Proposed guidance is expected
to be forthcoming from the
Department of Treasury and the
Internal Revenue Service. Such
guidance should foster additional
confidence and certainty with
respect to the practical benefits
of an already rather enticing new
tax planning
opportunity.
Author:
Steven D.
Shapiro –
Barnett, Bolt,
Kirkwood, Long
& Loche, P.A.
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