Wolters Kluwer Tax & Accounting explores the many issues with utilizing QOZs
The Tax Cuts and Jobs Act (TCJA) created a new provision in the Internal Revenue Code to permit taxpayers to defer and, at least to some extent, forgive tax on the gain from the sale or the exchange of property by investing that gain in specially designated Qualified Opportunity Zones (QOZs). The TCJA also restricted the use of like-kind exchanges, a commonly used tax deferral technique, to real estate and excluded its use for personal property. The Internal Revenue Service (IRS) has issued two major sets of proposed guidance on QOZs and hopes to finalize this guidance by the end of 2019.
Know the rules to qualify for tax deferral or forgiveness
As is the case with tax deferral in like-kind exchanges, in order to qualify for deferral or forgiveness of tax on a sale or exchange of property, there are a number of rules and timing requirements that must be met. There are also significant differences from the like-kind exchange rules.
- The QOZ rules require only reinvesting the amount of the gain on the sale, not the entire proceeds, as is the case with like-kind exchanges
- The gain must be invested in a Qualified Opportunity Fund (QOF), which in turn invests the funds in a QOZ, all with specified amount and timing requirements
- The tax on the gain can be deferred to as late as 2026, with up to 15 percent of the gain forgiven if certain holding period requirements are met
- If the gain is not invested in a QOF by December 31, 2019, the maximum possible forgiveness percentage falls to 10 percent
- Additional gain on the investment while in the QOF may be forgiven if held for more than 10 years
- Thousands of QOZs have been designated all around the country
- A number of unresolved issues remain with respect to qualification for these provisions that warrant care and professional assistance to meet all of the requirements
Expertise you can count on
Federal tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, is available to discuss the use of Qualified Opportunity Zones investments to defer or forgive gain on the sale of property.
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