The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone program, an initiative designed to lift Americans out of poverty and revitalize struggling areas. The program spurs economic development and job creation in more than 8,700 census tracts by offering preferential tax treatment to those investing certain eligible capital gains into Opportunity Zones through Qualified Opportunity Funds.
This is a win-win program with powerful benefits for communities and investors alike. To take full advantage as an investor, you’ll need to get familiar with several key provisions—including the 180-day rule.
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What is the Opportunity Zone 180-day Rule?
One of the benefits of investing in a Qualified Opportunity Fund (QOF) is the ability to temporarily defer taxes on eligible capital gains. Taxable gains invested in a QOF are not recognized until December 31, 2026 (due when you file your 2026 tax return or extension in 2027), or until the interest in the QOF is sold or exchanged, whichever happens first.To defer tax on an eligible gain, you’ll generally need to invest in a QOF within 180 days of realizing the gain. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you didn’t elect to defer the gain.
Let’s look at a simple example: Say you sold some stock for an eligible capital gain. Your 180-day period begins on the date of the sale. If you invest all or part of the eligible gain in a QOF during the 180-day period, you may elect to defer the tax on that amount.
How does the 180-day rule apply if you receive a Schedule K-1 from a partnership or other pass-through entity?
You might find out about eligible gains when you receive a Schedule K-1. A Schedule K-1 is issued by a flow-through or pass-through entity, which could be a partnership, S corporation, or trust—any of which could have eligible gains that would be reported on a Schedule K-1 to their partners, shareholders, or beneficiaries.
As the taxpayer receiving the Schedule K-1, you can choose to begin the 180-day period to invest eligible gains into a QOF on any one of three following dates:
- The last day of the flow-through entity’s taxable year
- The same date the flow-through entity realized the actual eligible gain at the entity level, i.e., the same date that the flow-through entity’s 180-day period begins
- The due date for the flow-through entity’s tax return without extensions for the taxable year in which the entity realized the gain
The date you receive the Schedule K-1 doesn’t matter, in terms of starting the 180-day investment period. However, a caveat to the different 180-day periods a taxpayer can use from a Schedule K-1 is that all of the partners, shareholders, or beneficiaries in the entity have to use the same date for making Opportunity Zone investments. You cannot pick and choose different dates to benefit different partners, shareholders, or beneficiaries. This taxpayer-friendly provision provides people who have gains from flow-through entities greater flexibility in making QOF investments.
How does the 180-day rule apply if you received capital gain dividends from a regulated investment company(RIC) or real estate investment trust (REIT)?
- For RIC or REIT capital gain dividends, you can choose to begin the 180-day period on either: The last day of your taxable year in which you would otherwise recognize the capital gain dividend
- The date of the dividend distribution
How does the 180-day rule apply to Section 1231 gains?
Section 1231 applies to depreciable property and real property used in a trade or business held for more than one year. In the context of QOFs, eligible Section 1231 gains are treated like other eligible capital gains. They are immediately available upon recognition as eligible gains to invest in a QOF. As such, your 180-day period to invest in a QOF begins on the date of the sale or exchange that gives rise to the eligible gain.
Section 1231 gains and losses do not have to be netted at the end of the year for Opportunity Zone investment purposes. So, you can invest only Section 1231 gains and still have Section 1231 losses to report on your current year tax return. The US Treasury incorporated this taxpayer-friendly provision into their Final Regulations.
How does the 180-day rule apply if proceeds from a property sale are being paid to me in installments?
You can choose between:
- A single 180-day period for making one or more investments in one or more QOFs; the first day of 180-day the period is the last day of the tax year in which the sale occurred
- A separate 180-day period for each installment payment; each 180-day period begins the day the installment payment is received
How do you report a deferral?
To elect to defer tax on an eligible gain, you’ll need to complete Form 8949 for the taxable year in which the gain would be recognized. The form shows that you made a qualifying investment: First, you had an eligible gain to defer; second, you invested within 180 days of realizing that eligible gain; and, finally, you invested in a QOF. You’ll also need to complete Form 8997. This form details the investment made into an eligible QOF.
While we’ve done our best to provide a clear summary of the 180-day rule for Opportunity Zone investments, it’s always best to seek the advice of a tax and/or financial professional.
Caliber – the Wealth Development Company – is a middle-market alternative asset manager and fund sponsor with approximately $1.5 billion in assets under management and development. The Company sponsors private funds, private syndications, as well as externally managed real estate investment trusts (REITs). It conducts substantially all business through CaliberCos, Inc., a vertically integrated asset manager delivering services which include capital formation and management, real estate development, construction management, acquisitions and sales. Caliber delivers a full suite of alternative investments to a $4 trillion market that includes high net worth, accredited and qualified investors, as well as family offices and smaller institutions. This strategy allows the Company to opportunistically compete in an evolving middle-market arena for alternative investments. Additional information can be found at CaliberCo.com and CaliberFunds.co.
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If you would like to speak to someone about diversifying your retirement accounts, contact us at firstname.lastname@example.org or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
- IRS: Opportunity Zones Frequently Asked Questions
- IRS: Facts About Opportunity Zones
- IRS: Tax Cuts and Jobs Act Opportunity Zones Webinar
- US Department of Housing and Urban Development (HUD) Opportunity Zone Reports
- SEC: Staff Statement on Opportunity Zones
- SEC: Spotlight on Opportunity Zones