Opportunity Zone/Fund Tax Deferral

5 Replies

Hello,
I sold a property back in August 2019. I made about $150K that I would need to pay capital gains tax on. I plan to invest the proceeds in an Opportunity Zone (personally) to defer my taxes.
I am getting conflicting information. A lot of good reliable sources are telling me that I need to create a Qualified Opportunity Fund (QOF) by EOY 2019 and move my money into the fund.
Then in 2020 I would need to purchase a property from the fund.

Question: The 180 day timeline - does that start from the sale of my property and do I need to purchase the new property within the 180 day timeframe? Meaning is it ok just to have a QOF created by Dec 2019 or do I also need to reinvest the money in the new property by Dec 2019?

Any help would be appreciated.

Hi @Raza Rizvi . Two different timelines at play here. 

1. You need to place your recently realized capital gains into a QOF within 180 days of realization to secure the deferral and eligibility for other OZ benefits. Based on the August sale, this gives you til late Jan-mid Feb 2020 to create the fund. Creating before the end of 2019 opens the door for a 15% exclusion on your deferred capital gain, whereas that exclusion would be capped at 10% if you wait until early 2020 to create/invest in the fund. 

2.  Once your money is in the Opportunity Fund, a new clock starts for deploying 90% of the capital in Opportunity Zone property or an Opportunity Zone Business. The first test is 6 months after the fund is created or  December 31, whichever comes first. BUT, the regulations allow a QOF to exclude recently contributed capital from the first testing date. So if you create the fund in NOV/DEC 2019, you won’t have to satisfy the 90% asset test until June 30, 2020. If you create the fund in January, you won’t have to satisfy the 90% test until December 31, 2020.


You can use a second-tier entity to stretch your timeline even further, but that’s probably outside the scope of your question. 

There is one additional consideration for determining when your 180 day investment timeframe begins.  If the property you sold in August was considered 1231 property (Section 1231 property is real or depreciable business property held for more than one year) then the 180 day period to invest into a QOF would begin on December 31, 2019.  That clarification was added in the second tranche of OZ guidance that came out in April.  Technically you shouldn't invest in a QOF before December 31 if your property was 1231 property.   The rest of the timelines that Scott outlined above still apply.

One of the biggest challenges in setting up your own fund is compliance.   Fund setup is very straight forward but compliance with the rules can be a large effort, particularly matching up the timing and size of your gain with the timing and size of the capital needs of the project.

Hey Raza,

I am in brooklyn and planing on setting up my own OZ. My property should close by end of January 2020.

Who have you hired to help you setup your own fund. Looking to start the process so I can have all my ducks in a row come 2020.

Cheers,

Josh

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