End of the Year Opportunity Zone Considerations

December 21, 2022
QOZ Program

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 In spring 2022, Congress proposed bipartisan legislation to update the Opportunity Zone program. The proposed changes included:

  • Extending the deferral period for qualified gains from 2026 to 2028
  • Providing for a full 15% step-up for investments held for 6 years prior to 2028 

Although this proposed legislation did not become law, there is a chance it could be passed in 2023 with a retroactive effective date. Assuming the proposed legislation becomes law in 2023, qualified gains invested by the end of 2022 could be eligible for a 15% basis increase.   

Background on qualified gains and the Opportunity Zone program

Generally, taxpayers with qualified gains can defer those gains by investing into a Qualified Opportunity Fund (QOF) within 180 days of sale (there are separate rules for qualified gain reported to a taxpayer on a Schedule K-1). 

The current law provides qualified gains are deferred until 2026, and if those gains were invested by the end of 2019, a taxpayer can be eligible for a 15% increase to basis (meaning only 85% of the qualified gains are recognized in 2026).  Qualified gains invested by the end of 2021 can be eligible for a 10% increase to basis (meaning 90% of the qualified gains are recognized in 2026).  Gains invested after 2021 are not currently eligible for any increase to basis. 

Potential opportunities with proposed legislation

The proposed legislation both extends the deferral period from 2026 to 2028 and only requires a taxpayer to hold their qualified investment for six years prior to 2028 to receive the full 15% increase to basis.  Practically, this means a taxpayer must invest their qualified gains into a QOF by the end of 2022 to receive the 15% increase to basis under this proposed legislation. 

While the proposed legislation is not law (meaning there is no current 15% basis increase for investments in 2022), there is a chance the proposed legislation will become law at some point in 2023.  If the proposed legislation does become law in 2023, and if a retroactive effective date is adopted, investments of qualified gains made by the end of 2022 would be eligible for the full 15% basis increase (provided all other requirements are satisfied).

What taxpayers should do next

Taxpayers realizing qualified capital gains could have a 180-day period to reinvest those gains that overlaps December 31, 2022.  If these taxpayers are committed to investing their qualified gains into a QOF, they could consider investing those gains by the end of 2022, which would result in a 15% basis increase if the proposed legislation is passed next year with a retroactive effective date. 

Taxpayers considering this approach should be mindful of the various Opportunity Zone program requirements.  Additionally, given the uncertainty of the proposed legislation becoming law, it may not be prudent for a taxpayer to invest qualified gains into a QOF by the end of 2022 solely because of the possible 15% basis increase. 

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