By Anayat Durrani

A little over a week remains until the Opportunity Zone deadline of December 31. The clock is ticking as time is running out for investors looking for a 10% tax break by investing in Opportunity Zones. Many fund managers say there has been a surge in investments in QOFs in the final months of 2021.

“With the year-end deadline approaching, Opportunity Zone investors need to keep in mind that their qualified investment needs to be invested in an OZ fund by year-end to qualify for the full OZ benefits,” says Kostas A. Poulakidas, partner at Taft in Chicago, Illinois. “This will then give the OZ fund and OZ investor some additional time to locate and invest in an OZ business. The key is to get funds into an OZ Fund before the end of the year.”

The last day of the year is the deadline for investors seeking Qualified Opportunity Zone investments to defer taxable gains. These tax benefits include a 10% basis step-up and related gain exclusion, which can defer having to pay capital gains on investments until Dec. 31, 2026.

“With year-end tax planning, we are seeing many investors look at what capital gains they have and determine whether an Opportunity Zone investment strategy is best for them,” says Poulakidas. “It will be important to work with tax professionals who also understand Opportunity Zones in order to make the best decision.”

What Opportunity Zone investors should consider before investing this year

With the deadline quickly approaching, there are some challenges and other things investors should be thinking about.

“In deciding whether or not to invest in a particular qualified opportunity fund, investors should take a host of factors into consideration, including but not limited to: strength and experience of the fund sponsor; asset class; geographic focus; whether a single asset or multi-asset fund; sponsor/affiliate fees; details regarding leverage; preferred return metrics; promote structure; and exit opportunities,” says Brett D. Siglin, Jennings Strouss in Phoenix, Arizona.

HCVT Senior Tax Partner Blake Christian says taxpayers have little time to perform a thorough due diligence on a deal so late in the year and says they are “assisting clients in forming their own “captive” OZ Funds—allowing them to “park” their qualified gains before the 10% deadline expires.”

Christian says investors can then invest in OZ projects in 2022. If they miss the deadline, he says it will generally only cost the taxpayer an additional 2.38% federal (10% x 23.8% maximum long-term gain rate) plus 10% of their state rate in 2027 when the deferred tax is paid.

“Short-term gains will lose approximately 4% benefit due to the higher rates. So still plenty of reasons to invest even after 2021,” says Christian.

Surge in Opportunity Zone investments to meet the deadline

Both Siglin and Christian say fund managers have seen a significant surge in investments in QOFs in the final months of 2021.

“Real estate investors in particular view the 10% basis step-up and the 2.38% increase in the project’s IRR as very compelling,” says Christian. “Since the Biden Administration has temporarily backed off on capital gain increases, taxpayers are also less concerned that they will be deferring taxes into a higher tax rate in 2027 when the taxes are paid.”

There’s still hope that Congress will enact legislation, says Siglin, to extend the OZ election and gain deferral periods from December 31, 2026 until December 31, 2028.

“It is also possible that Congress could enact legislation to make it again possible for investors to take advantage of a 10% step-up in basis for investments that are held beyond five years, which currently sunsets after December 31, 2021, and potentially even allow for investors to take advantage of a 15% step-up in basis for investments that are held beyond seven years,” says Siglin.

Christian says Congress has the ability to make tax law changes retroactive to the beginning of the year, “so we could certainly see an extension applicable to OZ investments made in January 2022 – even if Congress doesn’t pass the law until later in the year.”


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