According to the IRS, “A QOZ is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as QOZs if they have been nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service (IRS).”
In Congress, political discourse took a temporary break from feuding when both sides supported creating significant tax incentives for Qualified Opportunity Zone (QOZ) investing—as part of the 2017 Tax Cut and Jobs Act. The Act was co-authored by Senators Cory Booker, a Democrat from New Jersey, and Tim Scott, a Republican from South Carolina.
The concept centers around tax incentives for those who invest capital in designated areas around the country that could benefit from economic development. The idea is to reward investors who are helping in areas where revitalization is most needed.
So why are investors flocking to Qualified Opportunity Zones or “QOZ’s” in staggering numbers?
It is because of tax breaks, of course, and significant breaks at that.
Investors are lining up for the tax benefit of deferring capital gains until 2026 and then paying them in 2027 when they are due. If held for a full 10 years, all the real estate investment gains can be 100% tax-free. That’s huge, and savvy real estate people know it. However, Congress also created a set of flexible rules, because taxpayers generally have 180 days from the date a capital gain is triggered in which they can invest that gain, or a portion thereof in a QOZ, and defer federal income tax on the gain.
No. These deadlines are actually part of the Internal Revenue Code and cannot be extended for any reason except by a Presidential Disaster Declaration. The deadline is not extended if it falls on a Saturday, Sunday or legal holiday.
Identifications may be made to any party listed above. However, many times the escrow holder or closer is not equipped to receive your identification if they have not yet opened a transaction file. Therefore, it is easier and safer to identify through the Qualified intermediary or facilitator provided the identification is postmarked or received within the forty-five-day identification period.
It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.
If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property.
One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.
You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator.
Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse 1031 exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year while any losses the taxpayer suffered would be considered under separate code sections.
Yes. Although you may identify any three properties of any value under the three property rule, when using the two hundred percent rule there is a restriction. It is when identifying four or more properties, the total aggregate value of the properties identified must not exceed more than two hundred percent of the value of the relinquished property. An additional exception exists for those whose identification does not qualify under the three property or two hundred percent rules. The ninety-five percent exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired total at least ninety-five percent of the properties identified.
While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters.
The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, and accountant or similar persons acting as your agent is not sufficient.
Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.
The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.
Yes, although they can sometime become complex and always require appropriate planning. Most of our Qualified Intermediary or facilitator partners are owned by banks. This means that in most cases they will not handle reverse 1031 exchanges because liability reasons prevent them from holding title to property on behalf of an Exchanger. Provident suggests contacting one of our Partners for your reverse 1031 exchange planning and execution. They have demonstrated its unique planning and execution capabilities over a course of several years and they work closely with the most experienced tax attorneys in the country.
A Replacement Property is considered identified before the end of the 1031 Exchange 45-day identification period only if the following requirements are satisfied. However, any Replacement Property you receive before the end of the identification period will in all events be treated as identified before the end of the identification period.
A Replacement Property is identified only if it is designated as Replacement Property in a written document signed by you. This document must be sent before the end of the identification period to a person (other than yourself or a related party) involved in the exchange.
Yes, if you:
It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations.
Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange.
The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction.
Tax is calculated upon the taxable gain. Gain and Equity are two separate and distinct items. To determine your gain, identify your original purchase price, deduct any depreciation, which has been previously reported, then add the value of any improvements, which have been made to the property. The resulting figure will reflect your cost or tax basis. Your gain is then calculated by subtracting the cost basis from the net sales price.
Let us look at a basic concept, which applies to all exchanges. Use this concept to fully defer the capital gain taxes realized from the sale of a relinquished property:
To the extent that either of these rules is abridged, a tax liability will accrue to the Exchanger. If the replacement property purchase price is less, there will be tax. To the extent that not all equity is moved from the relinquished to the replacement property, there will be tax. This is not to say that the exchange will not qualify for these reasons; partial 1031 exchanges do in fact qualify for partial tax deferral. It simply means that the amount of any discrepancy will be taxed as boot, or non like-kind property.
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