Timing Considerations for Opportunity Zone Investments: Key Dates and What Investors and Sponsors Should Expect

• November 3, 2021
• Carey M. Heyman, CPA

Qualified Opportunity Zone (QOZ) investment activity often ebbs and flows throughout the year, with the greatest amount of activity taking place near timeout dates or the expiration of certain QOZ benefits. One such important benefit is the 10% step up in basis, which is set to expire on December 31, 2021. Investors that wish to take advantage of the 10% step up in basis must invest their capital gains on or before December 31, 2021. Similar to 2019 when the 15% step-up in basis benefit expired on December 31, 2019, sponsors should anticipate a flurry of investment leading up to the close of the year.

Tony Hallada of CLA’s Capital Markets group recalled that “November and December were two of the hottest months [of 2019] for opportunity zone investment.” Tony went on to say that “CLA’s Capital Markets group expects the last two months of 2021 to mirror that of 2019, with many investors looking to take advantage of an expiring benefit.”

We have already discussed the December 31, 2021 expiration date, but there are other important dates and rules to keep in mind.

For simplicity, we will split investors into two categories: (i) investors with direct capital gains and (ii) investors with capital gains from passthrough entities such as partnerships or S-Corporations. Investors with direct capital gains have 180 days from the gain event (sale date + 179 days) to deploy their capital into an QOZ investment.

Example 1 : An individual sold shares in a stock on October 4, 2021 and generated a $100,000 capital gain. This individual will have until April 1, 2022 to deploy the gains into an QOZ investment. But to take advantage of the 10% step up in basis, the individual will need to do so on or before December 31, 2021.

It gets a bit more complicated for capital gains generated through passthrough entities. Investors with capital gains from passthrough entities have 180 days from the recognition date to deploy the gains into an QOZ investment. There are three different dates that can be used as the recognition date: (i) the date of the sale, (ii) the end of of the year (December 31, 2021) or the due date of the passthrough entity tax return (March 15, 2022). Investors with passthrough capital gains can elect any of these dates as their recognition date, but it is important to avoid a couple potential pitfalls, which are illustrated in the following examples.

Example 2 : A partnership sold a property on April 15, 2021, which generated a long-term capital gain for Investor A of $100,000. Investor A would like to take advantage of the 10% step up in basis and have as much time as possible from today to make a QOZ investment. Investor A elects December 31, 2021 as their recognition date and invests the long-term capital gain in a QOZ Fund, thus receiving the 10% step up in basis. Any portion of this gain that is not invested on December 31, 2021 can be invested over the next 179 days, albeit without a 10% step up in basis.

Example 3: A partnership sold a property on April 15, 2021, which generated a long-term capital gain for Investor B of $100,000. Investor B would like to take advantage of the 10% step up in basis and make an investment today. Investor B elects April 15, 2021 as their recognition date. Unfortunately, as we are 180 days past the sale and recognition date, any attempted QOZ investment would be a non-qualifying investment,. Investor B is essentially in a blackout period between October 12, 2021 and December 31, 2021 due to their choice in recognition date.

Looking to learn more? Join us for a complimentary webinar on Wednesday, November 3rd at 12:00 PM CT. Big thanks to Lucas Whelan for authoring this blog post!

Tags: Opportunity Zone, Opportunity Zones, Qualified Opportunity Zones, Real Estate, Federal and state taxation, including proposed regulations, Industry best practices, Industry trends/analysis, Year-end tax planning | Comments Off on Timing Considerations for Opportunity Zone Investments: Key Dates and What Investors and Sponsors Should Expect