As tax payment time approaches and individuals are adjusting to the reality that tax liabilities are higher as a result of the Tax Cuts and Jobs Act of 2017 (the “Act”), one area of relief lies in Opportunity Zones where individuals can defer tax on capital gains until 2026 provided the capital gains are invested in Qualified Opportunity Zone Property (“QOZP”) or in a Qualified Opportunity Zone Business (“QOZB”). For investors who elect to defer capital gains to reduce their 2018 tax liability, there are numerous requirements to maintain the deferral.
First, a taxpayer has 180 days from the date the capital gain was realized to make the deferral election. For taxpayers looking to defer gains reported on a K-1, the investor has 180 days from the end of the year to make the deferral election. Once the deferral is made, the taxpayer has 180 days or less, depending on the date of deferral, to have 90% of their deferred assets invested in a QOZB or QOZP.
When a taxpayer defers a gain, the tax becomes payable as of December 31, 2026. If the investor holds their Opportunity Zone investments for 5 years, the tax due at 12/31/2026 is reduced by 10%. If the investments are held 7 years, the reduction of the tax due on 12/31/2026 is 15%. More importantly, if the Opportunity Zone investments are held for 10 years or more, any gains associated with the Opportunity Zone investments are excluded from the taxpayer’s taxable income in the year the gains are realized effectively giving the investor a step-up in basis to the fair market value on the date of disposition. One overlooked element of the deferral opportunity is the option to specifically identify which gains to defer. This isn’t an all or nothing election. For example, if an investor owns a hedge fund with significant short-term capital gains but the K-1 also reflects long-term capital losses, an investor can elect to defer the short-term gains while retaining the long-term losses to offset other long-term gains. For investors in high tax states (some of whom have lost most of their state and local tax deductions), this could reduce their income tax liability on income that could carry an incremental tax rate in excess of 50%.
To date, many investors have passed on deferring gains for two reasons. First, they believe there are insufficient quality investment opportunities where they can deploy capital. Second, many believe the 180 days to invest their assets isn’t sufficient to find suitable investments that fit with the investors long term investment objectives. There are numerous requirements that apply to investments in Opportunity Zones related to the location of the property or business, income derivation attributable to Opportunity Zones and ongoing reporting requirements and elections.
Foxdale can assist investors in managing their portfolio of Opportunity Zone investments through the platform operated by its affiliate, JMP Investments Shared Services (“JMPSS”). The JMPSS platform provides flexibility and optionality to high net worth and family office investors looking to create multi-asset, multi-year deferral Opportunity Zone investment portfolios. JMPSS assists investors in creating an investment structure that moves the deferred assets into a QOZB they control quickly and cost effectively. This structure provides high net worth and family office investors seeking to self-direct their investments the ability to create a multi-asset portfolio of Opportunity Zone investments where the investor can make multiple-gain, multiyear deferral contributions.
JMPSS provides administration and business support services to facilitate the management of the investor’s multi-asset portfolio. Our services include monitoring the investments for compliance with the requirements of the law, making the required calculations related to the specific investments and preparing the reports necessary to maintain compliance with the law. For investors and family offices sponsoring Opportunity Zone investments, JMPSS can assist with fund administration and making other investors on our platform aware of these investment opportunities where co-investment opportunities are available. Investors or their advisors looking
to learn more about the tax efficiency of the JMPSS structure, please contact JMPSS or Samuel Weiser.
About Foxdale Management LLC – Foxdale Management LLC (“Foxdale”) is an operational consulting firm assisting public and private businesses, investors and fund managers seeking solutions to operational, regulatory and compliance issues. JMP Investments Shared Services (“JMP”) is an extension Foxdale’s work assisting investors interested in taking advantage of the tax deferral opportunities associated with Opportunity Zone investments and sponsors in creating commingled vehicles to pool assets to fund investments in Opportunity Zone locations. JMP provides investors with a platform that provides maximum flexibility to leverage the benefits of the law and corresponding regulations. We can assist with getting the clock started on the deferral and holding periods. Through our network of professionals, JMP assists with structuring and support services to form the QOF and create a structure through an underlying investment in a Qualified Opportunity Zone Business (“QOZB”) that provides the investor with time to evaluate, select and invest in appropriate Opportunity Zone investments.
Nothing in this document is, or should be relied upon, as a promise or representation of the future. In all cases, interested parties should conduct their own investigation and analysis with their designated professional advisers. No representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein is made and the authors shall not be liable for the information contained in, or any omissions from, this document, nor for any of the written, electronic, or oral communications transmitted to the recipient. Neither the receipt of this document by any person, nor any information contained herein or supplied herewith or subsequently communicated in written, electronic, or oral form to any person shall be relied upon as constituting the giving of investment or tax advice by the Company to any such recipient. Each recipient should make his own independent
assessment of the merits of investing in Opportunity Zones and should consult his or her own professional advisors. This document contains certain statements, estimates, assumptions and projections which were prepared based upon the best information available at the time this document was prepared and may or may not prove to be correct. There is no representation, warranty, or assurance of any kind, express or implied, and actual results could vary from the conclusions expressed herein, and such variations that may arise could be material.