28 THE QUEENS COURIER • JANUARY 17, 2019 FOR BREAKING NEWS VISIT WWW.QNS.COM
TAX TIPS
Zone
Program
BY JOHN SAVIGNANO, CPA
IRS’s opportunity zone program is under way. It allows taxpayers
to defer capital gains from the sale of business or personal property
by investing the proceeds in opportunity funds to help development
of low-income communities. This incentive was enacted under the
new tax law, and many expect the program to be very popular.
New IRS guidance provides helpful rules. The proposed regulations,
which clarify definitions and address some open questions and
uncertainties, are a welcome relief for investors, fund managers and
others awaiting guidance before actively moving forward with the
new regime.
All sorts of taxpayers are eligible to participate: Individuals, C
corporations, partnerships, S corporations, LLCs, real estate investment
trusts, estates and more. To take advantage of the tax break, the
gains must be invested in a QOF... qualified opportunity fund. A
QOF is an entity that’s formed for the purpose of investing in qualified
opportunity zone property and that holds at least 90% of its
assets in such property. An entity Self-certifies as a QOF each year by
attaching Form 8996 to its tax return. IRS’s regs provide more details
on the rules to become a QOF. You have 180 days from the sale date
to invest the gain proceeds in a QOF. You can invest all of your short
or long-term capital gain proceeds from the sale or exchange of
assets to an unrelated party in a QOF...or just part of the gains. Only
the portion of the gains contributed to the QOF qualifies for deferral.
Taxpayers who opt to use this break must elect deferral on Form
8949, which they would file with their federal return for the year the
capital gain is realized. In the case of pass-through entities such as
partnerships, LLCs and S corporations, the election to defer capital
gains may be made by either the entity or an owner. If the owner
opts for deferral, then the 180-day period for investing gains in a
QOF begins on the last day of the pass-through firm’s tax year in
which the gain is realized.
Let’s turn to the main tax benefits from investing capital gains in a
QOF: the gains are deferred until Dec. 31, 2026, or sales of the QOF,
if earlier. Tax would generally be owed at that time on the deferral
gains less the tax basis in the QOF Investment. There’s no limit on
the amount of gains that can be deferred. The longer one holds a
QOF investment, the more tax incentives there are. The investor
begins with a zero-tax basis. If the QOF is held for at least five years,
then the basis increases by 10% of the originally deferred gain, which
essentially means that 10% of the deferred gain could gain could go
permanently untaxed. If held at least seven years, then the tax basis
is further increased by 5% of the gain that was originally deferred.
And if the QOF interest is held for 10 or more years, taxpayers can
elect to hike basis to fair market value at the time of sale, so that
post-acquisition appreciation in the QOF isn’t taxed when the interest
is sold.
John Savignano is a partner with Savignano Accountants & Advisors
located at 47-46 Vernon Blvd., Second Floor, in Long Island City.
If you have any questions or require additional information, please
call John at 718-707-0955.
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