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Deadline Nears for Opportunity Zone Deferred Gains Step-Up: What Does It Mean?

By Marc Rapport – Nov 20, 2021 at 8:45AM

Key Points

  • Dec. 31 is the deadline for a 10% break on capital gains taxes for qualified opportunity fund investments.
  • That’s a nice incentive, but the project’s overall prospects are more important.
  • Being in an opportunity zone doesn’t make a deal worthwhile, but it can make it better.

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The opportunity zone deferral step-up deadline is not the only reason to invest.

Time is running out for investors to take advantage of a big tax break by putting money into one of the country's 8,700 or so opportunity zones, which are designed to stimulate investment in lower-income areas. 

Dec. 31, 2021, is the deadline to qualify for a 10% break in the already monumental tax deferrals you can enjoy for investing in a qualified opportunity fund (QOF) and keeping it there.

Here's what investors need to know about this opportunity, and what remains even if you don't make that deadline.

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Image source: Getty Images.

QOF attraction fades along with the likelihood of capital gains tax hikes

The opportunity zone program was created by the 2017 Tax Cuts and Jobs Act and billed as a win-win for successful investors and for communities that could use some additional outside investment.

It empowers investors to defer capital gains taxes from the sale of stocks, bonds, private businesses, or real estate by reinvesting the proceeds into a qualified opportunity fund (QOF) within 180 days of the sale. The funds are then expected to invest that money into developing or redeveloping property in any of the nation's opportunity zones. Investors can defer paying capital gains on their original investment -- the gains that were invested into the QOF -- all the way out to Dec. 31, 2026. 

In addition to deferring capital gains for several years, any gains from the QOF itself are permanently excluded if the investment in the fund is held for 10 years or more.

If that wasn't enough, there is an additional benefit for investors that get into opportunity zones early. If an investor were to put money into an opportunity zone and hold it there for more than five years before deferred capital gains are due (Dec. 31, 2026), then the cost basis of their previous gain would be increased by 10%, therefore reducing the overall tax bill. 

Here's the catch, though. Dec. 31, or about five weeks from now, is the last date for investors to receive this 10% break on their original capital gains. After Dec. 31, there's no way to achieve that five-year holding period by Dec. 31, 2026.

That requirement, and expectations that the new Biden administration and Democratic-controlled Congress would raise capital gains taxes in general, were supposed to drive a new wave of QOF investments this year.

But the odds of a capital-gains tax hike have dimmed and, according to Jeffrey Bowden, a real estate tax principal with accounting firm  Anchin in New York City, so has interest among his clients in investing in opportunity zones.

A good opportunity if it's shovel-ready

If a promising project is shovel-ready in an opportunity zone, the 10% capital gains break may well just make a good investment an even better one, Bowden says. But the tax benefit shouldn't be the sole reason for making such a move.

"It's still a meaningful amount," he says, "but it's more like sprinkles on a cake," he adds. 

More important than chasing the tax benefit from this form of real estate investing is to ensure that your money is going into a worthwhile project. After all, investing in a losing deal just for the tax gain rarely is worth it.

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