Opportunity Zone/Fund Tax Deferral

[Raza Rizvi]

Hello, I sold a property back in August 2019. I made about $150K that I would need to pay capital gains tax on. I plan to invest the proceeds in an Opportunity Zone (personally) to defer my taxes. I am getting conflicting information. A lot of good reliable sources are telling me that I need to create a Qualified Opportunity Fund (QOF) by EOY 2019 and move my money into the fund. Then in 2020 I would need to purchase a property from the fund. Question: The 180 day timeline - does that start from the sale of my property and do I need to purchase the new property within the 180 day timeframe? Meaning is it ok just to have a QOF created by Dec 2019 or do I also need to reinvest the money in the new property by Dec 2019? Any help would be appreciated.

[Scott McIntosh]

Hi @Raza Rizvi. Two different timelines at play here. 

1. You need to place your recently realized capital gains into a QOF within 180 days of realization to secure the deferral and eligibility for other OZ benefits. Based on the August sale, this gives you til late Jan-mid Feb 2020 to create the fund. Creating before the end of 2019 opens the door for a 15% exclusion on your deferred capital gain, whereas that exclusion would be capped at 10% if you wait until early 2020 to create/invest in the fund. 

2.  Once your money is in the Opportunity Fund, a new clock starts for deploying 90% of the capital in Opportunity Zone property or an Opportunity Zone Business. The first test is 6 months after the fund is created or  December 31, whichever comes first. BUT, the regulations allow a QOF to exclude recently contributed capital from the first testing date. So if you create the fund in NOV/DEC 2019, you won’t have to satisfy the 90% asset test until June 30, 2020. If you create the fund in January, you won’t have to satisfy the 90% test until December 31, 2020.

You can use a second-tier entity to stretch your timeline even further, but that’s probably outside the scope of your question.