First and foremost, due to the IRS extension, if you realized capital gains on or after October 4, 2019, they qualify for investment in an OZ Fund until December 31, 2020. However, certain capital gains qualification timelines date even further back depending on the type of capital gain. Due to investor timeline extensions stemming from COVID, an extraordinary amount of capital gains are poised to take advantage of Opportunity Zone incentives this calendar year.
Investors typically have 180 days from the date of realizing a gain to place their gains in an OZ Fund, but this calendar year is an exception. We provide clarity on the five most common types of capital gains, their typical and ongoing qualifying placement timelines, and how the 2020 extension applies to them:
Partnership Gains - January 2019 or later still qualify
Partners in a partnership, shareholders of an S corporation, and beneficiaries of estates and non-grantor trusts have the option to start the 180-day investment period on any of the following dates:
-The last day of the partnership taxable year (Generally December 31)
-The same date that the partnership’s 180-day period begins (Date the partnership had the gain); or
-The due date for the partnership’s tax return, without extensions, for the taxable year in which the partnership realized the eligible gain (March 15)
To put it simply, gains within a partnership realized anytime in 2019 are eligible for investment until December 31, 2020. If realized in 2020, the partnership gains can be invested this year or in 2021 if within 180 days of starting their chosen qualifying placement timeline.
Commercial Real Estate Gains (Section 1231 Gain) - Two scenarios exist
Scenario 1) Rules in Place for 2019 prior to the final OZ Regulations passed in December 2019.
Gains from the sale of property used in a trade or business (i.e. most rental property) are invested on the basis of the net gain, meaning that after netting all 1231 gains and losses for the year, a 1231 net gain still exists to invest. The 180 investment period begins on December 31 of the year the property sold, meaning any net 1231 gains from 2019 still qualify for investment until December, 2020 due to the IRS extension.
Scenario 2) Rules in Place for 2020 after the final OZ Regulations were finalized in December 2019
Each section 1231 gain now stands on it’s own and is not netted with any 1231 losses. Investors can invest the entirety, or any amount, of a gross 1231 gain into an OZ Fund. Gains from the sale of Section 1231 property are now on a 180 day clock from the date of the asset sale and can be invested immediately. Any 1231 gains realized in 2020 still qualify for investment.
*1231 gains scenarios can be complicated. We have provided an overview but are not allowed to give specific tax advice so please talk to your CPA or tax advisor about your specific situation.
Unrecaptured Depreciation (Section 1250 Gain) - October 2019 or later still qualify
Yes, unrecaptured depreciation can be invested in OZ Funds. The sale of commercial real estate results in two types of gains: the gain on the sale (Section 1231, discussed in the previous paragraph) and the gain on unrecaptured depreciation (Section 1250). To provide a simple example: someone acquires a property for $100K, between buying and selling the property they claim $20K in depreciation, and sell the property for $200K. The 1231 gain for the sale is a $100K and the 1250 gain for the sale is $20K. The investor could invest up to $120k in an OZ Fund. As with all other gains right now, if a 1250 gain was realized on or after October 4th, 2019, it is eligible for investment until December 31, 2020.
Individual Gains (i.e. Stocks and Personal Property) - October 2019 or later still qualify
Individual gains (including gains from the sale of stocks, bonds, futures, funds, personal property and more) are eligible to be invested in a Qualified Opportunity Zone Fund within 180 days of realizing them. Special to 2020, if realized on or after October 4th, 2019, these gains are eligible for investment until December 31, 2020.
Note on 1031 Exchanges
The transition from 1031 to OZ is extremely simple and maintains significant tax advantages. If an investor had a failed 1031 exchange this year, their capital gains still have until December 31, 2020 to be placed in an OZ Fund. Investors can sell an existing property, put any portion of their capital gains into an OZ Fund, and extract the principal. Unlike with a 1031, where you need to roll the entire gain and principal forward into like-kind property.
Capital Gains Already Placed in an Existing OZ Fund
A number of investors set up their own Opportunity Zone Fund (QOF) but later found more compelling options, such as a professionally managed OZ Funds, or were unable to source the projects required to remain compliant. In this case, if an investor’s gains are still in their qualified investment window, they can reallocate some or all of the gains out of the initial QOF and invest them into another OZ Fund.
Do you still have questions about investing capital gains in a Qualified Opportunity Zone? Perhaps regarding a specific type of capital gain not mentioned here? Contact a representative of the Four Points Funding team to learn more.
Disclaimer: Four Points Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.