Opportunity Zone-Timing of investment and max gain deferral

Technical topics regarding tax preparation.
#1
merlin  
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Hey all,

One of those first-time-last-minute-clients with the trickiest subjects (Opp Zone, in this case) arrives at your door....
Would appreciate your input regarding the following-

Using a simple example:
Gain from stocks sold $150K
Property purchased in OZ: $50K

From an article and IRS website I saw-
"Investor recognizes a capital gain.
Within 180 days, Investor invests an amount equal to the amount of gain Investor desires to be deferred in a QOF."

1. Per the above quote, does it mean that you have to buy the OZ property (and qualify for gain deferral on the stock sale), up to 180 days after the sale of stocks and realizing a gain or within a range of 180 days 'before and after' the sale?

2. My understanding from what I've read is that the gain that can be deferred here is up to the value of the property that was purchased (50K).
This client bought property for a lot less than the gain was. Am I right that his max gain to defer is 50K?

He might be eligible to gain-free of appreciation, if will hold the property10 years but I don't think he can exclude all the gain on the stocks now.

Many thanks for your input.
 

#2
merlin  
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I think that the answer to #1 is in Q24 of the IRS FAQs
https://www.irs.gov/credits-deductions/ ... -questions
 

#3
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On #2, that’s correct. The OZ rules don’t work like the Sec 1031 rules. Under the 1031 rules, you have to re-invest all the proceeds to defer all the gain. Not so with the OZ rules.

You’ll need to fill out Form 8997 for the year of the sale(s) [which I believe is 2020] and you’ll need to fill it out for subsequent years as well. You’ll also need to make the appropriate entries on Form 8949. I assume the gains in question came through via routine stock trading (Form 8949), not via a K1. And I don’t know if there’s any short-term gains that can be deferred, which might be helpful.

but I don't think he can exclude all the gain on the stocks now.


Correct. Only $50k can be excluded in your example. But there’s also potential step-up’s for 5-year and 7-year holds. Sounds like he’ll be eligible for the 5-year 10% step-up, but not the 7-year 5% step-up.

And note that your state might not conform to the federal law.
 

#4
merlin  
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Thanks!
 

#5
A2Zcpa  
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Follow up question on completing Form 8897 - gains deferred are via partnership investments so 180-day deferral period starts on 12/31/2020 in my case and investment into OpZone is made in 2021. Does my 2020 8897 report the contribution (effectively matching the gain deferral on Schedule D) or is it truly a cash-basis form and the investment gets reported next year? I can't tell form the instructions. It's definitely not because I'm operating at about 10% brain capacity or anything...
 

#6
A2Zcpa  
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Nevermind - I just looked at the actual form. Report PY/CY based on tax year of gain deferrals.
 

#7
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Regarding question #1 of the OP.
Per embedded link:
Q22. When do I have to invest the amount of an eligible gain in a QOF to qualify for the QOZ tax incentives?

A22. Generally, you have 180 days to invest an eligible gain in a QOF. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain.

Why cant you take the date of the sale as first day gain is realized and count backward 180 days? Client has capital gains that are eligible for deferral that were sold within 180 period before investing in QOF, as well as capital gains from assets sold in 180 day period after investing in QOF (total amount invested in QOF exceeds all capital gains for the year).

Additionally, the following link uses the term "within" 180 days:
https://www.irs.gov/credits-deductions/ ... unity-fund:
Timing of Investments
To defer tax on an eligible gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt interest) within 180 days of realizing the gain. In general, if you don’t defer the gain, the gain would be recognized for federal income tax purposes the first day of the 180-day period.

Am I stretching to much to suggest client can defer all capital gains realized "within 180 days" using the first day as occurring 180 before (counting forward) the investment in the QOF as well as using the first day as occurring 180 day after investing (counting backward).
 

#8
eze  
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Let's back up....did last minute client buy OZ property or invest in an OZ Fund? When I did it, we had to form an LLC to great the "fund". LLC has additional forms and K1 reporting related to the property investment.

Is there another an entity involved here or just an individual and some property.
 

#9
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Thanks for reply. Individ TP sold rental property & invested the entire proceeds (not just gain) into a qual op fund. In addition to Real Estate capital gains there are several stock capital gains throughout the year. The amount invested in the QOF exceeds enough the capital gain from real estate and capital gains from stock sales, occurring within 180 day period prior to investing.





It would be great to also defer capital gains that occurred after investing in the QOF and are inside a 180 window counting first from date of sale, backward 180 days to investment.
The regs don't say the 180 period must chronologically occur before investment & the term 'within' 180 days is also used
 

#10
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The QOF was already in existence
 


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