What to do with capital gains in a COVID-19 world: QOZs represent an attractive opportunity for investors
In response to recent market volatility caused by the COVID-19 pandemic and resulting economic impact, many investors have sold assets and have significant capital gains. Unfortunately, those sales also produced tax consequences that many investors were not planning for.
Rather than paying the tax on the capital gains and returning to the same volatile public markets, there is another option that not only provides investors the potential for attractive returns, but also lessons the tax consequences from their recent sales. That option is investing in Qualified Opportunity Zones (QOZs).
Specifically, the tax benefits of investing in a QOZ are as follows:
- Deferral of capital gains taxes until Dec. 31, 2026.
- 10% reduction of capital gains tax if the QOZ investment is held for five years.
- No tax on the appreciation of a QOZ investment if held for at least 10 years.
As a result of changes to the tax filing deadlines caused by the COVID-19 pandemic, certain deadlines associated with the QOZ program have been modified. Below is a summary of several key changes:
- Under the QOZ regulations, investors have 180 days from the time of their capital gain to invest that gain into a QOZ Fund. Due to the COVID crisis and changes to tax filing dates, any investor whose 180-day deadline falls between April 1, 2020 and December 31, 2020 will be given until December 31, 2020 to identify and make an investment. Thoughtful consideration should be given to contributions made from 2019 gains if the contributions are after the extended due date of the investor’s tax returns.
- Investors who sold real estate or have other forms of Section 1231 gain generated in 2019 have until December 31, 2020 to invest those gains.
- Investors who have received payments in 2019 from installment sales (i.e., escrow payouts, deferred payouts, etc.) have until December 31, 2020 to invest those gains.
- Investors who generated a capital gain in 2019 through a pass-through entity (which includes Partnerships, LLCs, S-Corps and Trusts) has until December 31, 2020 to invest those gains into a QOZ.
Cresset Partners, together with Diversified Real Estate Capital, have launched two QOZ Funds that focus on core real estate development investments in QOZs. The Cresset-Diversified partnership launched its first fund, Cresset-Diversified QOZ Fund I, in December 2018 and raised $465 million to invest in seven institutional-quality projects located in markets around the country. Cresset-Diversified recently announced the launch of its second fund, Cresset-Diversified QOZ Fund II, which will similarly target QOZ projects with the potential for substantial risk-adjusted, tax-advantaged returns. Fund II will invest in core urban markets across the country with a focus on multi-family, office, industrial and retail investments located in QOZs.
To help accommodate investors with upcoming deadlines, the first close for the Cresset-Diversified QOZ Fund II will be July 1, 2020. If you would like to learn more about investing in QOZs, please email QOZ@cressetpartners.com or visit https://cressetpartners.com/cresset-diversified-qoz.