Real Estate Qualified Opportunity Zones for Tax Deferral on Capital Gains

Cendrowski Corporate Advisors can help business owners maximize tax efficiency by taking advantage of real estate opportunity zones through purchasing property in government-designated distressed communities that may afford tax-efficient investment opportunities.

What is an Opportunity Zone?

Professional tax preparation is an absolute necessity for high-wealth individuals and business owners. Cendrowski
Corporate Advisors in metro Detroit and Chicago provide professional tax preparation to ensure maximum tax efficiency. Federal and state governments often require the results of careful research and planning to be displayed throughout tax filings, and CCA ensures those requirements are met.

Through the Qualified Opportunity Fund (QOF), investors put money into Qualified Opportunity Zone properties as a method of deferring tax payments on capital gains realized from the sale of capital assets.

Created as a way to encourage investment that brings economic growth to distressed areas, it’s one tool that Cendrowski Corporate Advisors consultants use to craft unique tax planning strategies that defer tax on capital gains.

Real Estate Opportunity Zones Property Planning: Investing Through Qualified Opportunity Funds

Through Qualified Opportunity Funds, investors may become eligible for tax deferral benefits. However, investors are required to place all related capital gains into a Qualified Opportunity Fund within 180 days of gain realization. These tax deferral benefits apply to individuals, corporations, and flow-through entities. There’s no limit to the amount of capital gains that can be deferred by reinvesting in a Qualified Opportunity Fund.

The tax benefit depends on the timing of the investment in a Qualified Opportunity Fund and can include:

  • Gain deferral: Capital Gains from the sale of assets reinvested in a Qualified Opportunity Zone Fund are deferred until the earlier of (a) sale of the interest in the QOF or (b) Dec. 31, 2026.
  • Gain elimination: Depending on the length of time an investment in a QOF is held, you may be able to permanently eliminate part of the gain. If the investment is held for five years, 10% of the deferred gain is eliminated. If the QOF investment is held for seven years, then 15% of the original gain is eliminated from taxable income.
  • Tax elimination on appreciation: If you hold the investment for at least ten years, you can step up the basis of the Qualified Opportunity Fund investment to the fair market value on the date you dispose of it. Therefore, no capital gains tax would apply to gain on the sale of the investment.

Client Success: Opportunity Zones Planning Can Apply Post-Purchase

A long-standing hospitality owner-operator acquired a previously owned hotel located in a qualifying Opportunity Zone. The client did not acquire the property with the intention of qualifying the property as a tax deferral for capital gains. However, it was brought to the owner’s attention that several of his investors could benefit from the tax deferral of gains by qualifying his LLC as a Qualified Opportunity Zone Fund (QOF). We educated the owner on the relative costs and benefits of QOF and bonus depreciation.

As part of most hospitality acquisitions, the new owner conducts property improvement programs (PiP). Thanks to recent tax legislation, the PiP expenditures, as well as a substantial portion of the cost of the acquired building were deductible over the first two or three years of operating the property. This left the owner deciding whether to qualify the property as a QOF or take advantage of the rapid write-off of acquisition and improvement costs.

Cendrowski Corporate Advisors worked with the owner/operator, assisting in negotiations with the seller for purchase price allocation beneficial to the two tax strategies. Our team also worked with the client’s counsel to provide language for the LLC operating agreement to support the tax strategies. Cendrowski Corporate Advisors leveraged decades of cost segregation expertise in this analysis. The owner/operator presented the property to his investor group, allowing the potential investors to identify which of the two strategies benefited them.

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