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OPPORTUNITY ZONES LIMIT ON CAPITAL GAINS TAX DEFERMENT REQUIRES PLANNING By Howard Kline

A recent article on GlobeSt.com addresses some misconceptions about Opportunity Zones, or as I refer to them, “oZones”. What really caught my attention in the article and a really big gotcha is addressed in the last portion of the article in which Marc Wieder points out that there is a tax reckoning day. The article is correct in pointing out that a portion of the tax deferment will be due in 2026. With this being said, the potential benefits of oZones, remain. I think that it is important to distinguish the tax deferral benefits from the adjusted basis benefits, for tax purposes in order to understand the significance of the 2026 deadline. For illustrative purposes, let's assume that in 2008 Joe purchased a 4-plex. In February 2019 he sold it, realizing a capital gain of $700,000. In March 2019, he invests the full amount of the capital gain, from the sale of the 4-plex, into a 20-unit, multi-family complex, ("20-unit"), located in an oZone. in March 2019, he would be able to defer the capital gain of $700,000 realized from the sale of the 4-plex, only until 2026. When he files his taxes for 2026, he will have to claim the $700,000 capital claims, whether or not he sold the 20-unit. The hard deadline on the tax deferral is a major distinction between a 1031 Exchange tax deferment and that being offered by the oZone legislation. In a 1031 Exchange, taxes on the capital gains are not due until the property is sold and the gains are not rolled over into another 1031 Exchange. This is where the gotcha comes in, but only comes into play if the investor does not properly plan for 2026.