Anyone in the real estate business is aware of the powerful, impactful and flexible Opportunity Zone (OZ) Program which became effective Jan. 1, 2018 as part of the Trump Administration’s bi-partisan Tax Cuts and Jobs Act (2017 Tax Act). However, developers are generally required to modify their traditional game plan of contributing property, receiving equity as “carried interest” in the partnership and navigating the related-party and self-constructed asset rules in order to comply with some of the unique structuring requirements under Internal Revenue Code (IRC) Section 1400Z and related Regulations which control the OZ Program.
The OZ program currently allows up to a current five-year federal (and in all states other than CA, MS, NC, NY and MA) tax deferral on virtually any U.S. short-term or long-term capital gain, other than gains generated on related-party transactions (20% common ownership). For gains invested into a Qualified Opportunity Fund (QOF) by Dec. 31, 2021, the OZ program allows the taxpayer to increase their tax basis in the QOF by 10% after holding the QOF interest for 5 years. Provided the taxpayer has held the QOF for the required five-year holding period on the earlier of: i) Dec. 31, 2026, or ii) the disposition date of the QOF interest the taxpayer only reports 90% of the deferred tax gain. For example, a taxpayer deferring a $1 million gain will report $900,000 on Dec. 31, 2026 (or on an earlier disposition or “Inclusion Event” date).