By Ann Ramage, CPA | Tax Partner | Family, Executive & Entrepreneur Advisory Services team
Whether or not your 2017 federal income tax return has been filed, if you generated capital gain on the sale of property July 5, 2017 or after AND have made new investments in the first half of 2018, additional 2017 tax planning options may be available.
A, so far, lesser highlighted provision of the Tax Cuts and Jobs Act of 2017 (TCJA), the Qualified Opportunity Zone (QOZ), is now coming into the spotlight as tax professionals and taxpayers continue to review, digest and estimate the impact of the TCJA for 2018 and beyond. The Qualified Opportunity Zone provisions of the TCJA are intended to spur growth and development in economically challenged areas of the country by incentivizing private investment through several provisions that provide for income tax deferral, reduction and/or exclusion of qualifying capital gain. Specifically, an investing taxpayer generating capital gain may identify and fund an investment in a Qualified Opportunity Zone Fund at a level less than or equal to the gain previously recognized and then elect to defer the gain recognized on the earlier transaction via the QOZ provisions. Depending on the investing taxpayer’s ultimate holding period and the QOZ Fund’s business decisions, the investing taxpayer may reap additional benefits of the gain reduction or exclusion provisions, instead of merely gain deferral until the earlier of the date of sale of the investment or December 31, 2026.
While most discussion of the TCJA provisions are forward looking to 2018 and beyond, a 2017 tax planning opportunity may still exist for certain taxpayers to allow 2017 capital gain income tax deferral to the extent qualifying investments in QOZs have been made in 2018 within the 180 day period following the 2017 capital gain’s recognition. While the first date an investment may qualify/self-certify as a Qualified Opportunity Zone Fund is January 1, 2018, an investing taxpayer may have the opportunity to look back to 2017 and exclude 2017 capital gain from 2017 income tax under this deferral election if the investing taxpayer meets all of the QOZ provisions. As an example, if an investing taxpayer generated capital gain July 5, 2017 and identified and invested in a QOZ Fund on January 1, 2018, a 2017 election to defer the gain is available to the investing taxpayer as the 180 day period is satisfied. The Internal Revenue Service issued Frequently Asked Questions (FAQ) on the QOZ, most recently updated June 7, 2018, specifically providing in Q12 that a deferral election may be made on a taxpayer’s 2017 tax return; however, the FAQ only offered that guidance would be forthcoming shortly on how to make the election on the 2017 tax return. In this same FAQ – Q13, the Internal Revenue Service provided that an investing taxpayer who previously filed its 2017 income tax return may amend the 2017 tax return to make this election to defer the income tax on the capital gain. The amended return filing is to follow the election procedure, yet to be provided, as detailed for an originally filed 2017 tax return in FAQ Q12.
Given the lure of the Qualified Opportunity Zone provisions, reviewing your 2018 investments to determine investment timing and whether the Fund has/will self-certify as a Qualified Opportunity Zone may provide additional 2017 tax planning opportunities to reduce your 2017 federal income tax liability, before looking ahead to 2018 tax planning opportunities.
The Opportunity Zone incentives are an attractive tax benefit available to real estate investors and developers as well as investors and proprietors of operating businesses, and will hopefully serve to transform communities that have been in need for a long time. Interested in learning more about how the incentives may apply to you? We can help. Contact your Keiter representative or our Family, Executive & Entrepreneur Advisory Services team. 804.747.0000. Email.
Source: IRS FAQ’s
Additional Family, Executives, and Entrepreneurs Tax and Accounting Insights:
- How to Use 1031 Exchange Funds to Improve Acquired Property
- Seven 2018 Tax Developments That May Affect Your Tax Situation
- Charitable Contributions: Potential Impact on Section 199A
- Keiter Blog
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.