Investors typically have 180 days to invest their capital gains into a QOZ Fund after the gains have been realized. Factors such as which entity generated the capital gain and the type of capital gain should be evaluated and will determine the start date or dates that can be used. For instance, investors that generated their 2019 gains via pass-through vehicles (think partnership or LLC investments) could start their 180-day window as late as March 15, 2020.
Investors that are considering investments in Qualified Opportunity Zone Funds (QOZ Funds) were given extra time by the IRS to reap the tax benefits of investing their 2019 capital gains in QOZ Funds. However, investors that are considering making an investment into a QOZ Fund need to be thoughtful about the timing of the investment.
As a result of the COVID-19 pandemic, the IRS recently published guidance that modified the 180-day window for investors. Investors whose 180-day window would have expired between April 1, 2020 and December 31, 2020 have been given an extended deadline of December 31, 2020. This guidance effectively gives investors extra time to make their investments into QOZ Funds, and in some cases allows investors a second chance to invest 2019 gains.
Because the 180-day window was extended to December 31, 2020, investors with 2019 gains should coordinate the timing of their investments into a QOZ Fund with the preparation and filing of their 2019 tax returns. The extended filing date for the 2019 individual tax returns is October 15, 2020. Investors have an opportunity to invest their 2019 capital gains into a QOZ fund and complete their 2019 QOZ reporting on their timely filed tax returns by October 15, 2020. Otherwise, investors that wait to invest their 2019 capital gains until after October 15, 2020 will need to amend and re-file their 2019 tax returns if they want to take advantage of QOZ tax deferrals.
Besides extending the statute of limitations or the length of time in which the IRS can audit the tax returns, there is a belief that amended tax returns are more likely to be audited than tax returns that were timely filed. It should be noted that investors that have already filed their 2019 tax returns, but would like to invest 2019 capital gains, can still do so by filing a corrected, rather than amended, tax return. Investors should consult their tax advisors about the timing considerations of making investments of 2019 capital gains before or after the October 15, 2020 filing deadline.
Other benefits of making an investment earlier into a QOZ Fund can include:
- Preferred return interest for investors starts sooner.
- Capacity risk is minimized.
Cresset Partners and 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 launched its second fund, Cresset-Diversified QOZ Fund II, which similarly targets QOZ projects with the potential for substantial risk-adjusted, tax-advantaged returns. Fund II invests in core urban markets across the country with a focus on multi-family, industrial, and select office real estate located in QOZs.
If you would like to learn more about investing in QOZs, please email QOZ@cressetpartners.com or visit https://cressetpartners.com/cresset-diversified-qoz.