On December 6, a second set of opportunity zone rules was sent for review.
Per the White House Office of Management and Budget website, the guidance will include the following: types of property qualifying as qualified opportunity zone business property, and the steps a qualified opportunity zone business (QOZB) must take to be a QOZB. Additionally, it will cover some guidance on penalties and reporting requirements for when you withdraw from the fund.
The December 31, 2019, deadline is looming
December 31, 2019, is the last date to invest in Opportunity Zones and receive the maximum benefits.
After this date, the step-up in basis on the original gain will drop to 10% as long as they make their investment by December 31, 2021. Under current rules, taxpayers who have an eligible deferral will receive basis step-ups in their original deferred gain that they will need to pay the tax on in their 2026 tax return (or the earlier that they dispose of their QOF interest). The step-up is 5% for holding the QOF interest a period of seven years and 10% for holding it for five years.
As an example, say John Smith has a gain of $100,000 and invests the gain properly within the 180-day period into a Qualified Opportunity Fund on December 20, 2019. If John Smith continues holding the investment past 2026, he will receive a basis step up of 15%, reducing the gain to $85,000 that he will pay tax on his 2026 tax return.
However, if John Smith invests on January 5, 2020, it is impossible to hold the QOF interest a period of seven years before we get to 2026. Therefore, he will only receive a 10% step up and will pay tax on $90,000.
Assuming a federal tax rate of 23.8%, the change in the tax paid once the seven-year hold drops off is only $1,190. Given the somewhat nominal impact, we caution people from rushing to an investment without proper due diligence by December 31, 2019, to get the extra 5% step-up in basis.
New and updated tax forms
On October 31, 2019, the IRS and Treasury issued a new draft form 8996 for Qualified Opportunity Zone Funds (QOF). Form 8996 serves as the QOF self-certification form and must be filed by every QOF. The new draft form requires much more information to be reported than the previous 2018 version.
For property owned directly by the QOF, the following is required to be reported:
- Each census tract where QOZ business property (QOZBP) owned or leased by the taxpayer is located
- The value of QOZBP on each testing date
For QOFs with indirect ownership in QOZBP through a qualified opportunity zone partnership interest or stock (QOZBs), the following is required to be reported:
- Every census tract in which the tangible property of the QOZ business is located
- EIN of the QOZB
- The value of the QOZ ownership interest held at each testing date apportioned to each census tract
- The value of the tangible property held by the QOZB at each testing date
When an equity interest in a QOF is disposed of, the draft form 8996 requires a statement containing the following information:
- The investor's name
- The date in which all or some of the QOF equity interest was disposed
- The interest that each investor transferred during the QOF's tax year
A new tax form was released for investors in a QOF to inform the IRS of the investment and deferred gains held at the beginning and end of the current tax year as well as any gains disposed of.
Are you ready for the deadline?
For more information on opportunity zones and how you could benefit, contact Wipfli. Or continue reading on in these related articles:
How you can benefit from investing in opportunity zones
Your top 7 opportunity zone questions answered