Understanding the Mortgage Interest Deduction after the Tax Cuts and Jobs Act

Understanding the Mortgage Interest Deduction after the Tax Cuts and Jobs ActThe TCJA modified the mortgage interest deduction for homeowners. Here’s what you need to know about the changes.

Home ownership has long been the American dream.  Mortgage loans have made it possible for the majority of American homeowners to afford buying a home. The government has encouraged home-ownership by offering tax breaks linked to mortgages, but recent changes in tax law changes how much a typical homeowner-taxpayer will benefit from the deductions. In 2018, the Tax Cuts and Jobs Act (TCJA) changed the rules on how much mortgage interest can be deducted from taxable income.

Mortgage limits

Mortgage interest was one of the biggest deductions that tax law allowed. Unlike interest in borrowing for personal expenses, mortgage interest on a taxpayer’s residence can be deducted as an itemized deduction.

TCJA modified the mortgage interest deduction in several ways. The change that garnered the most attention was the reduction in the amount of interest that you’re allowed to deduct. Going forward, taxpayers will only be able to deduct interest on up to $750,000 of mortgage debt, down from $1 million under prior law.

The old $1 million mortgage limit is grandfathered in for existing mortgages, but if a taxpayer obtains a new mortgage post-TCJA, they will be subject to the lower limit. Taxpayers obtaining new mortgages exceeding $750,000are still eligible for a mortgage deduction, however, it will only be on the portion of interest attributable to the first $750,000 borrowing.

Home equity debt

Under old law, taxpayers could deduct interest on up to $100,000 of home equity debt. This allowed taxpayers to do whatever they wanted with the money, including paying down other types of debt (credit card, student loan, auto loans, etc.) or spending on things unrelated to their residence while still able to deduct the interest.

Tax reform under TCJA partially took away the ability to deduct interest on home equity debt. The interest is still tax deductible if the loan is used to buy, build, or improve your home and doesn’t bring the total outstanding mortgage above the new $750,000 limit. If the home equity debt was used for other purposes, it is no longer deductible. Unlike other changes, existing home equity loans were not grandfathered in.

Refinancing

It is important for taxpayers to understand how refinancing an existing mortgage will work for income tax purposes. When a taxpayer takes a mortgage to buy or build a home, it counts as home acquisition debt and is capped at $750,000. A mortgage for other purposes is treated as a home equity debt and now receives no interest deduction. When a taxpayer refinances a mortgage they originally counted as home acquisition debt, the refinanced mortgage will also count as home acquisition debt as long as it is in the same amount. If there is excess borrowed in the refinancing, the extra portion of cash pulled out will be treated as home equity debt, so that portion of the interest you pay won’t be deductible unless it is used to improve the home.

Key takeaways

  1. Interest payments are deductible on mortgage debt up to $750,000 (formerly $1 million).
  2. Deduction for other home equity debt (HELOCs and second mortgages eliminated (formerly $100,000).

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

Accounting Concerns for Legal Marijuana Business Operations

Accounting Concerns for Legal Marijuana Business OperationsAccounting for the growing cannabis industry is unique. Here’s why.

The goal of any accounting system is to ensure that accurate financial information is available timely to users. An appropriate system will include processes and procedures for collecting, recording and classifying data and will assist in preventing and detecting waste or, even worse, fraud.

So why is accounting for the growing cannabis industry so unique?

Management, investors and other financial statement users require the same accurate financial information as any other industry. However, in this growing industry, businesses must comply with strict state and federal regulations to avoid substantial penalties or even the risk of losing their business.

Cannabusiness accounting and compliance

Proper and adequate accounting systems and controls are even more critical in a cannabis business where the business “touches the plant.” Growers, processors and distributors have unique accounting and compliance needs unlike any other industry. The potential for large cash transactions and banking restrictions common in the industry further emphasize the need for proper accounting controls and procedures.

As states begin to legalize marijuana for medical and recreational use, businesses will need to consider the unique challenges the industry faces at the onset. The federal government considers business operations in this space to be “trafficking in controlled substances.” As such, proper accounting and reporting should incorporate the nuances of Internal Revenue Code Sec. 280E and 471 relating to cost accounting and inventory. In addition, state regulations require industry tracking and reporting of “seed to sale.” Most states with legalized marijuana industry require businesses to have inventory control and reporting systems in place as well as an interface with state mandated tracking systems. Therefore, the accounting system must provide reports and analysis to support compliance with federal and local regulations.

In this highly regulated environment, the business can be audited at any moment. All records must be available and in order to prove compliance with state and federal regulations. Furthermore, the accounting for businesses in this industry will need to provide for transactions to and from related entities, segment or separate “lines of business” reporting and consolidation. Business structures often include related entity relationships and investments. These advanced accounting issues are uncommon for most young or start-up businesses in other industries.

While many businesses entering the Cannabusiness space are new businesses, they cannot approach their accounting and bookkeeping in a manner often seen with new business start-ups. It’s common for a start-up to lack a proper accounting system and accounting controls before the business is up and running. A Cannabusiness business must have their system and controls in place well before they start operations.

We’ve got your back

Cannabusiness is a developing industry with many complicated factors. If you’re starting a business in this space, don’t go it alone! Contact Managing Partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

Real Estate FAQs from Last Month

Answers to real estate FAQs on 1031s and more

My team and I regularly receive questions on real estate-related topics. In this blog post, I answer some of those questions as they are important and others likely need the answers.

Realty Transfer Fee

Question: What is the realty transfer fee and who can expect to pay it?
Answers to this month's real estate FAQs
Answer:  The Realty Transfer Fee, also known as “RTF,” is a fee imposed by the State of New Jersey to offset the costs of tracking real estate transactions. Upon the transfer of the deed to the buyer, the seller pays the RTF, which is based upon the property sales price.

The RTF rate is a graduated rate and there are two different structures, depending on whether the total consideration is over or under $350,000.

It is important to note that a 1% fee must be paid by the buyer on all real estate transactions over $1 million in all commercial and residential property classes. This is also known as the “Mansion Tax.”

1031 Exchange Identification Rule

Question: What happens if you list three properties as replacement properties for your 1031 exchange, but all properties are no longer available?

Answer: One of the requirements of a 1031 exchange is taxpayers must identify a list of properties for potential purchase within 45 calendar days. Whichever property is ultimately purchased must be on this list. The rule allows taxpayers to identify three properties without limitation. Those listed are property that may be purchased, however not all are required to be purchased. If more than three properties are identified, the IRS rules become narrower and stringent.

The list can be changed an infinite amount of times until midnight of the 45th day. If the taxpayer is beyond the 45th day, the list is unchangeable and only properties listed can be chosen to complete the exchange. If the properties are not available after the 45th day, a 1031 exchange cannot be completed and the transaction is not eligible for deferral under Code Section 1031.

Section 179 Expensing

Question: Did the Tax Cut and Jobs Act (TCJA) change 179 expensing for rental property owners?

Answer: A provision of the tax code, commonly known as Section 179 deduction, allows taxpayers to deduct the entire cost of eligible property in the first year it is placed in service. For rental real estate owners, eligible property includes the majority of improvements to the interior portion of a nonresidential building, provided the improvement is put to use after the date the building was placed in service

The TCJA expanded the definition of eligible property to include expenditures for nonresidential roofs, HVAC equipment, fire protection and alarm systems, and security systems.

We’ve got your back

Have a burning real estate question? Email me and I’ll answer it in an upcoming post.

How to Read and Understand the Balance Sheet

How to Read and Understand the Balance SheetDetermine the health of a business by analyzing its Balance Sheet

The balance sheet is a standard financial report that is often included with a business’ financial statements.

It is easy for business owners to understand the profit and loss statement (P&L), which provides business revenues and expenses for a given period. The balance sheet, however, provides a snapshot of a company’s accounts, specifically assets, liabilities and equity, at a given time.

So why is understanding your balance sheet so important?

First, as mentioned above, it includes the company’s assets at a specific point in time (i.e., month-end, year-end, etc.). A classified balance sheet will list the assets by liquidity and show what can and should be converted to cash quickly to pay for liabilities, operating expenses, or to invest in new ventures. Conversely, the non-liquid assets will also be listed and tell readers what the company owns long-term.

The liabilities section of the balance will show any upcoming amounts due in the short-term as well as any long-term balances. Usually, a liability is considered short-term if it is due within 12 months of the balance sheet date.

When reviewing a company’s balance sheet, the reader will review current liabilities as well as the current assets and determine if the company has sufficient current assets to settle short-term liabilities.

If current liabilities exceed current assets, the reader may conclude that the company may not be able to settle current liabilities as they come due.

Long term assets and liabilities

The long-term assets and liabilities also tell a story about the company’s future. Long-term assets such as notes receivable will advise the reader that the company will convert the assets to cash in the future. The long-term liabilities will advise of the future commitments the company has and its ability to settle those future commitments.

Analyzing a company’s balance sheet from one period to another will also provide information regarding the business health. For example, reviewing the trend in accounts receivable from one period to another can identify issues such as slow collections and uncollectible debts.

The equity section of the balance sheet is made up of the initial investment in the company and any accumulated profits or losses retained in the business at the balance sheet date. This balance is what the owners would expect if the company was liquidated. If equity is negative, the company would not have sufficient assets to settle its debts if the assets were liquidated at the balance sheet value.

For the balance sheet to be an effective tool for business owners in analyzing the strengths of their business, it should be kept on the accrual basis. In fact, financial statements prepared on the GAAP basis (Generally Accepted Accounting Principles) are usually accrual basis. An accrual basis balance sheet will include all accounts receivables and accounts payables, thus providing an accurate snap shot of the company’s assets and liabilities at a specific date.

Conversely, cash basis balance sheets will not include the receivables and payables and, if these items are material to the business, the reader will not know what collections are expected in the short-term and what liabilities will need cash in the immediate future.

If you are a small business owner take a moment to review your balance sheet. Understanding how to improve specific account balances can help you grow a financially secure business.

We’ve got your back

At KRS, our CPAs can help you review your balance sheet and put together a plan for improving your company’s financial situation. Give us a call at 201.655.7411 or email me at [email protected]

 

Qualified Joint Venture between Spouses

Qualified Joint Venture between SpousesAn unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. However, in 2007, there was an addition to the Internal Revenue Code that excludes from partnership status a Qualified Joint Venture (“QJV”) conducted by a married couple who file a joint return. This was enacted by Congress to alleviate what was considered an unnecessary burden of filing partnership returns where the only members of a business joint venture are a husband and wife filing a joint income tax return.

Definition of a Qualified Joint Venture

QJV is defined as any joint venture involving the conduct of a trade or business if:

  1. the only members of the joint venture are married;
  2. both spouses materially participate;[1] and
  3. both spouses elect the application of QJV treatment.

A qualified joint venture, for purposes of the provision enacted in 2007, includes only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity (including a limited partnership or limited liability company). If the business is owned and operated by spouses as co-owners, it will not qualify for the election. There are special rules for married couple state law entities in community property states.[2]

Filing requirements for qualified joint ventures

As a result of utilizing the QJV election each spouse should file a separate Schedule C reporting his or her respective share of the items of the venture. There is no prescribed form for making the election.  The election is deemed made on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between each spouse in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Profit or Loss from Business).

QJV implications for real estate

Now that you have the basics of a QJV, you might be thinking, “isn’t this a real estate blog?”

You’re correct, this is a real estate blog.

If you and your spouse each materially participate as defined under the at-risk and passive activity limitations and you file a joint return for the tax year, you may elect to be taxed as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 Return of Partnership Income, for any year the election is in effect and will instead report the income and deduction directly on your joint return.

To make this election for a rental real estate business, check the “QJV” box on line 2 for each property that is part of the qualified joint venture.

The confusion surrounding a QJV typically arises in non-community property states, including New Jersey and New York, where spouses jointly own interests in an LLC.  The LLC purchases a rental property, which now needs to be reported on a partnership return instead of Schedule E of the individuals’ 1040s. As noted above, the QJV will not apply to a venture that is in the name of a state law entity.

We’ve got your back

If you are considering not filing a partnership return because of the QJV election, you should contact your preparer to review the rules, especially related to rentals owned by LLCs where spouses are the only members.

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

[1] IRC Section 469(h).

[2] Rev. Proc. 2002-69.

Tax Implications on Sale of a Partnership Interest

In determining gain or loss on sale of a partnership interest, taxpayers are often surprised to find they have a taxable gain.

For income tax purposes gain or loss is the difference between the amount realized and adjusted basis of the partnership interest in the hands of the partner.

Amount Realized

The amount the partner will realize will include any cash and the fair market value of any property received.  Further, if the partnership has liabilities, the amount realized will include the partner’s share of the partnership liabilities. If the partner remains liable for the debt, the amount realized will not include the partner’s share of the liability.Tax Implications on Sale of a Partnership Interest

Examples of Amount Realized:

Example 1 – Sale of Partnership interest with no debt:

Amy is a member in ABC, LLC which has no outstanding liabilities. Amy sells her entire interest to Dave for $30,000 of cash and property that has a fair market value of $70,000. Amy’s amount realized is $100,000.

Example 2 – Sale of partnership interest with partnership debt:

Amy is a member of ABC, LLC and has a $23,000 basis in her interest. Amy’s membership interest is 1/3 of the LLC. When Amy sells her 1/3 interest for $100,000 the partnership has a liability of $9,000. Amy’s amount realized would be $103,000 ($100,000 + ($9,000 x 1/3).

Gain Realized

Generally, a partner selling his partnership interest recognizes capital gain or loss on the sale. The amount of the gain or loss recognized is the difference between the amount realized and the partner’s adjusted tax basis in his partnership interest.

Example 1 (from above)- Sale of Partnership interest with no debt:

Assume Amy’s basis was $40,000. Amy would realize a gain of $60,000 ($100,000 – $40,000).

Example 2 (from above) – Sale of partnership interest with partnership debt:

Amy’s basis was $23,000. Amy would realize a gain of $80,000 ($103,000 realized less $23,000 basis).

Character of Gain

Partnership taxation establishes the general rule that gain on sale a partnership interest receives favorable capital gain treatment.  However, gains attributable to so-called “hot assets,” which include inventory, depreciation recapture, and accounts receivable of a cash basis partnership are taxed at less favorable ordinary income rates.

To the extent that a sale is attributable to the selling partner’s share of the hot assets, the resulting gain or loss is taxed at ordinary income rates. When real estate is sold to the extent the gain on sale is attributable to depreciation deductions, the resulting gain is treated as unrecaptured IRC §1250 section gain. §1250 gain is taxed at a flat 25% rate.

Like-Kind Exchange

It is important to note that in IRC §1031 (like-kind exchange), non-recognition treatment does not apply to exchanges of partnership interests.

We’ve Got Your Back

If you’re selling your partnership interest, we can help you plan the sale so that you pay no more tax than necessary. Contact Simon Filip, the Real Estate Tax Guy, at [email protected] or 201.655.7411 today.

R&D Tax Credits for Food & Beverage Companies

Certain research expenses can help your food or beverage company save on taxes.

Companies operating in the food and beverage industry are constantly facing increased costs in raw materials, fuel, and regulatory changes while trying to keep pricing competitive and gain market share. Rising costs can be related to research and development (R&D), which include developing new products related to food safety, reducing costs, natural ingredients, dietary guidelines, and sustainable resources.
R&D Tax Credits for Food & Beverage Companies
Luckily, federal and state governments offer R&D tax credits to reduce some of these expenses. The credit allows companies to receive tax breaks on costs associated with technological research performed in the United States. These costs do not have to be the direct cause of a new product or process, but rather activities they already perform.

Activities eligible for R&D credits

Activities that may qualify could fall into numerous categories including food, processes, packaging, and sustainability. A few examples are:

  • Improving taste, texture, or nutritional content of food product formulations
  • Developing techniques that will reduce costs and/or improve product consistency
  • Improving machinery and equipment to ensure safe handling of food
  • Create new packaging to improve shelf life, durability, and/or product integrity
  • Switching to a more environmental friendly packaging
  • Costs associated with being more energy efficient
  • Creating new methods for minimizing contamination, scrap, waste, and spoilage

The credits can be as much as 20 percent of qualified research expenses, which include, but are not limited to, wages, supplies, and contract expenses. Remember, the R&D credit is not a deduction against income, but rather a dollar-for-dollar credit against taxes owed or taxes paid.

There are changes to the tax credits under the new tax law. Prior to the Tax Cuts and Jobs Act (TCJA), the corporate AMT tax rate was 20 percent, regardless of credits or certain deductions. Post-TCJA, AMT tax is eliminated and C Corporations will now be taxed at 21 percent, allowing corporations to take greater advantage of these tax credits. However, one limitation still applies. If a corporation has over $25,000 in regular tax liability, they cannot use R&D tax credits to offset more than 75 percent of their regular tax liability.

Under the TCJA, companies will no longer be able to expense costs that are related to research after 2021. These costs will be capitalized and amortized over a five-year period. Expenses for research activities performed outside the United States would be amortized over a fifteen-year period.

We’ve Got Your Back

As a tax advisor in the food and beverage industry, we ensure that our clients take full advantage of these tax credits. If you would like to learn if your company is eligible for these credits, please contact Sean Faust, CPA of KRS CPAs’ Food and Beverage Practice at 201-655-7411 or [email protected].

The New Tax Law’s Impact on Law Firms

New tax rules that apply to law firms are complicated

Lakeland Bank Breakfast presentation
Breakfast with Lakeland Bank: The Impact of the Tax Cuts and Jobs Act on Law Firms. Neil Gordon and Ottilia Stura from Lakeland Bank, with Maria Rollins and Jerry Shanker

KRS partner Jerry Shanker and I discussed the impact of the Tax Cuts and Jobs Act on law firms at a Breakfast with Lakeland Bank on June 12.

From working with our law firm clients and associates, we realized that many firms are still scrambling to come to grips with the tax code changes and develop tax planning strategies around them. The attendees at our Lakeland Bank talk had similar concerns.

While many businesses stand to benefit from the tax code overhaul, when it comes to the Act’s impact on law firms and their partners and associates – it can get complicated.

These key provisions of the Act affect law firms and their members:

  • Reduction in individual and corporate income tax rates
  • $10,000 annual limit on deduction of state and local income taxes (SALT). This includes deduction for real estate taxes
  • No deduction for miscellaneous itemized deductions Increased standard deductions
  • Introduction of new Code Section 199A, which provides for a tax deduction of 20% of qualified business income, subject to limitations and exclusions

Free Guide for Law Firms

We’ve summarized several other key changes in the tax code that impact law firms in a downloadable guide, “The Tax Cuts and Jobs Act of 2017 – Considerations for Law Firms.”

TCJA Considerations for Attorneys
Law firms need to develop new tax planning strategies so they don’t pay more tax than necessary under the new tax laws.

If you are a managing partner or executive at your law firm, understanding the factors covered in the Guide will help you and your firm determine the best strategy for optimizing your firm’s and your partners’ tax positions. By downloading this guide, you will learn:

  • How the choice of business entity – C-Corp, S-Corp, or pass-throughs – is impacted by the updated code
  • New rules for specified service businesses
  • Changes that impact entertainment and fringe benefit expenses
  • Code Section 179 changes that impact expense deductions
  • New limitations on business interest and excess business loss
  • Key changes to Section 199A deductions that impact individual W-2 wage earners.

Download the Guide

We’ve got your back

At KRS, we’re working to help our clients understand and navigate the new tax law changes – and those affecting law firms are particularly complicated. Because each law firm’s and individuals’ taxable income and deductions are unique, each individual set of facts and circumstances must be reviewed.  We’re happy to help you with yours. Contact me at [email protected] or 201.655.7411 for an initial consultation.

Estate Tax Implications for Foreign Investors in US Real Estate

Estate taxes for US persons

An estate of a US citizen or resident alien is subject to an estate tax based upon the value of the worldwide property, owned or subject to certain rights or powers by the decedent on the date of death. The estate tax rate for 2018 is 40% for taxable estates in excess of an $11.18 million exemption, which is adjusted annually for inflation.Estate Tax Implications for Foreign Investors in US Real Estate

A US estate may also deduct from the taxable estate a marital deduction equal to the value of property left to a surviving spouse. The amount of lifetime taxable gifts during the decedent’s life is also included in calculating the gross estate.

Non-resident aliens and their estate taxes

While US citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, non-residents (persons who are neither US citizens nor US domiciliaries) are only subject to the US estate tax on property that is situated, or deemed situated, in the United States.

The gross estate of a Non-Resident Alien (“NRA”) includes all tangible and intangible property situated in the US, in which the decedent has an interest at the time of his death or over which he has certain rights or powers.

The taxable estate of an NRA is taxed at rates up to 40% of the value of estate in excess of a $60,000 exemption. Additionally, the estate of an NRA is generally not allowed a marital deduction unless the surviving spouse is a US citizen.

US property included in an NRA’s estate includes US real property owned or under his control and interests in US partnerships (including those holding positions in real property).

It is important to note the US does have estate tax treaties with multiple countries including Canada, France, Germany, Greece, Italy, Japan, and the UK, amongst others. These treaties may provide estate tax relief to residents of treaty jurisdictions.

Non-citizen spouse

When your spouse is not a US citizen, the unlimited marital deduction is unavailable. This is true regardless of whether or not the decedent is an American citizen. The result is the $11.18 million exemption is unavailable and the entire estate transferred to a non-citizen spouse would be subject to estate tax. With advance planning, the non-citizen spouse estate tax implication can be reduced or eliminated.

Planning to reduce estate taxes

There are several structures that will avoid or minimize the US estate tax of a Non-Resident Alien:

  1. The property can be held in the name of a foreign corporation.
  2. The property can be held in an irrevocable trust or a trust whose assets would not be included in the settlor’s gross estate for US estate tax purposes.
  3. The title can be held in a two-tier structure with the property in the name of an American company (US real property Holding Corporation) whose shares are held by an offshore company.

Although these structures are intended to avoid the US estate tax, the structures may result in the unintended consequence of higher taxes on sale, rental income, and, in some jurisdictions, franchise taxes.

We’ve got your back

If you are a Non-Resident Alien, we can help you plan so that your estate pays no more tax than necessary, while avoiding those unintended consequences. Contact Simon Filip, the Real Estate Tax Guy, at [email protected] or 201.655.7411 today.

Qualified Opportunity Zones under the Tax Cuts and Jobs Act

QO Zones offer incentives for investment in low income communities

Qualified Opportunity Zones under the Tax Cuts and Jobs Act

The Qualified Opportunity Zone Program (“QO Program”) enacted as part of The Tax Cuts and Jobs Act is a new incentive designed to promote investment in low-income communities by allowing taxpayers to defer, reduce, and potentially exclude gain recognition on certain investments made in Qualified Opportunity Zones (“QO Zones”).

Qualified Opportunity Funds (“QO Funds”)

Investors wishing to utilize the Opportunity Zone Program must invest their gain in a QO Fund. In order to meet the criteria of a QO Fund, 90% of the assets held by the vehicle on the last day of the fund’s taxable year (and the last day of the first six month period of the fund’s taxable year) must be qualified opportunity zone property (“QOZ Property”) within a QO Zone acquired after December 1, 2017.

The Act requires the Treasury Secretary to establish guidance for the certification process of QO Funds, which will likely be administered by the Department of Treasury’s Community Development Financial Institutions Fund (“CDFI Fund”).

What are QO Zones?

The QO Program requires a QO Fund to make direct or indirect investments in a QO Zone. Qualified Opportunity Zones (QO Zones) are defined as certain low-income communities that are experiencing uneven economic development, resulting in pockets of disinvestment and unemployment.

In New Jersey, Governor Murphy nominated 169 low-income tracts in 20 counties for designations a QO Zones. On April 9th, the U.S. Department of Treasury approved Governor Murphy’s designation of such tracts as QO Zones.

Tax Benefits of Investing in Opportunity Zones

The QO Program offers three tax benefits for investing in low-income communities through a QO Fund:

  1. A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the dates on which the opportunity zone investment is disposed of or December 31, 2026.
  2. A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% of the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and an additional 5% is held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
  3. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.

Other Highlights

Some important items to note under the QO Program:

  1. Gains must be reinvested within 180 days in order to qualify for tax deferral under the QO Program.
  2. There is no “like-kind” requirement as part of the program. An investor could sell a mutual fund and reinvest gains into a QO Fund that will develop real estate in one of the selected census tracts.
  3. The program is still being formulated. The next step is for the Treasury Department to promulgate regulations for the establishment of Opportunity Funds, the vehicles which QO Zones investments will be made.

We’ve got your back

Like many other aspects of the new tax law, QO Zones can get complicated. With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.