Time is running out on a favorable tax benefit.
By: Erik Sherman | GlobeSt.com
There’s a bleak deadline quickly approaching for the tax conscious. Qualified opportunity zones have been a tactical maneuver to defer capital gains for investments and see some step-up in basis to reduce taxes. But that ends come December 31, 2021. Starting January first, those tax advantages disappear. That seems to be nudging some last-minute investing.
QOZs were part of the 2017 Tax Cuts and Jobs law, which times out on December 31, 2026. Before then, taking capital gains and investing them into a QOZ has offered two tax benefits. One is tax deferral through 2026, unless there’s a disposition of the investment first. That allows the investor to make additional money from the tax payment during the deferral.
The other part of the program has been tax reduction. There is a basis step-up in tax treatment depending on the length of time the investment was held. If for five years, that would be 10%. Holding for seven years would add another 5% step-up, but that additional timing is no longer available as there isn’t enough time between 2021 and 2026.
Also, by holding an investment for ten years, an investor can eliminate any taxes on capital gains realized for the QOZ project.
Some say they’ve seen increased interest because of the impending deadline. “I have seen a substantial uptick in inquiries and transactions,” Daniel Ryan, a partner with Sullivan & Worcester, tells GlobeSt.com.
Reid Thomas, managing director and chief revenue officer of JTC Americas, agrees, with 2021 “the best year yet in terms of investments into Opportunity Zones,” as he tells GlobeSt.com. “We also continue to see projects and investment trends that reinforce Opportunity Zones as a leading tool for positive impact in communities in need.”
Others have noticed something more complex because of the Biden administration’s expressed interest in raising a number of taxes, including capital gains.
“We have seen an interest in QOZ projects this year, but there has not been a year-end rush,” says Edward Renn, a partner in the private client and tax team of law firm Withers. “Given the confusion in the fall regarding what the tax rate on capital gains would be, many clients did not want to defer capital gain they could pay 23.8% tax on in 2021 when that same capital gain could be taxed at 28.8% or higher in 2026. Similarly, high-net worth individuals do not want to defer capital gain in 2021 when they could be hit with a 5% or 8% surcharge on that same amount when the tax deferral provided by a QOZ investment comes to an end.”
The question for investors, according to Renn, becomes whether a QOZ investment will provide a significant enough return and if a ten-year tax-free appreciation is ultimately enough of a return.
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