Opportunity Zones – Start Planning for Gain Recognition

The Opportunity Zone Program provides taxpayers with tax enhanced returns on their qualified investments into designated opportunity zones. The program provides several benefits for taxpayers including temporary deferral of gains, step-up in tax basis on certain investments, and exclusion of taxable gains for investments held for 10 years or more. The tax benefits, coupled with sound economics, can greatly elevate the attractiveness of a deal or investment. The gains that were reinvested into opportunity zones and deferred as part of this program are not deferred until the investment is liquidated. Rather, the gain deferral is a temporary relief of tax liability.

All gains deferred into opportunity zones will be deemed to be recognized and taxable on December 31, 2026. This may be a challenging recognition event if the properties are not generating cash flow by the time the tax is due. Investors in opportunity zones should start thinking about the tax liability coming due so they can adequately plan cash flows.

Investors may also want to look at their portfolio and identify capital losses to offset the gain recognition. To further complicate planning, not all states conformed to the Federal provisions. In addition, some states decoupled from the provisions years after the program was established. This could mean that taxpayers have already paid tax on their gains at the state level while others were able to defer the gain. In addition, qualified investments into the same fund may have been tax deferred to the state in one year and fully taxable in another.

Taxpayers should work with their advisors to make sure they appropriately plan and not drastically over or underpay any estimated tax liability. For more information, please contact Mark Schneider, Partner and Real Estate Tax Leader, or your Anchin Relationship Partner.