United States: Real Reporter Publishes "Op Funds Expand Deferral Paths For CRE Investors"

Last Updated: December 18 2018
Article by Paul C. Bauer and Matthew A. Morris

BOSTON — The Tax Cuts and Jobs Act of 2017 created the Opportunity Zone program which provides real estate investors a new tool to defer gains from sales or exchanges of capital assets by investing those gains in a "Qualified Opportunity Fund." The program aims to stimulate investment in economically disadvantaged areas by deferring capital gains recognition for up to seven years if the gain is invested in a Fund, and avoiding capital gains on the appreciation of the Fund investment after a 10-year holding period. While there are unanswered questions regarding the tax consequences of dispositions of property within the Fund itself, the tax benefits are clearly established and offer several distinct advantages over Section 1031 like-kind exchanges.

The new law comes under Section 1400Z of the Internal Revenue Code ("1400Z"). A Fund under 1400Z could be as simple as a two-member LLC or as complex as a large C corporation with hundreds of shareholders. A Fund must be a partnership or corporation for U.S. income tax purposes, has to "self-certify" as a Fund in the first tax year that it intends to so qualify, and must hold at least 90 percent of its stock, partnership interests or business assets in Qualified Opportunity Zone ("Zone") property. Tangible property qualifies if (a) it was purchased after December 31, 2017; (b) the original use of the property commences with the Fund or the Fund "substantially improves" the property, and; (c) during "substantially all" of the Fund's holding period, "substantially all" of the property's use is within a Zone.

1400Z provides that each state may select up to 25 percent of its low-income communities for potential designation as Zones. Massachusetts submitted a list of 138 low-income census tracts for designation as Zones, all of which the U.S. Treasury so designated. The U.S. Treasury Community Development Financial Institutions (CDFI) Fund provides links to several Qualified Opportunity Zone program resources on its website, including a searchable map of Zone tracts.1

1400Z provides that "[i]n the case of gain from the sale to, or exchange with, an unrelated person of any property held by the taxpayer," the taxpayer will not recognize gain if he or she invests an amount at least equal to that gain in a Fund within 180 days of the sale or exchange. The taxpayer's basis in the Fund investment will be zero for the first five years. After five years, the basis increases to 10 percent of the deferred gain; after 7 years, it increases by an additional 5 percent. Gain on the amount that the taxpayer invests in the Fund will be deferred until the earlier of the date on which the investment is sold or December 31, 2026. Therefore, if the taxpayer sells a capital asset in 2019, invests in a Fund within 180 days, and holds the investment until 2027, then the taxpayer excludes 15 percent of the original gain from tax and defers recognition of that gain from 2019 to 2026. The real payoff is after 10 years, when the taxpayer can increase the basis in the Fund investment to its fair market value on the date sold or exchanged—all appreciation will then avoid tax.

Example: On January 1, 2019, Ellen sells an office building with an adjusted basis of $200,000 for a contract price of $300,000. On January 15, 2019, Ellen invests the portion of the proceeds representing capital gain ($100,000) in a Fund and keeps the $200,000 as a non-taxable return of basis. Ellen does not have to recognize the $100,000 in capital gains until December 31, 2026, when she will report an adjusted basis in the Fund investment of $15,000 and a capital gain of $85,000 because she held the investment for seven years before December 31, 2026. Her adjusted basis in the investment after December 31, 2026 is $100,000. If Ellen sells her Fund investment for $200,000 on January 16, 2029 (10 years and one day after her initial investment), she can elect to increase her adjusted basis in the investment from $100,000 to the fair market value of $200,000, thereby avoiding capital gains on the $100,000 appreciation.

Real estate investors have long understood and used like-kind exchanges under section 1031. Both 1400Z and 1031 require closing on the second investment within 180 days and offer the possibility to defer capital gains, but that is where their similarities end. 1400Z provides for deferral of capital gain on "any property held by the taxpayer," whereas 1031 is limited to like-kind real property. 1400Z provides that the taxpayer only needs to invest disposition gain in a Fund and can thus retain his or her adjusted basis as a return of capital. If a taxpayer only wants to reinvest a portion of the total proceeds in a 1031 exchange, the taxpayer will recognize gain on the retained cash. Further, there are no geographical restrictions on qualified replacement property under 1031, unlike 1400Z. Unlike 1031, 1400Z does not require the taxpayer to identify the Fund investment within 45 days or to acquire the investment through a qualified intermediary.

1031 exchange property can be transferred after a two-year safe harbor (or less than two years under a facts and circumstances test), but a taxpayer is locked into a Fund investment for 10 years to maximize tax benefits. Even if the taxpayer holds the investment for 10 years, it is unclear how much freedom the Fund itself has to exchange one Zone property for another without incurring capital gains.

For investors who intend to hold assets for at least 10 years, 1400Z provides an advantage over 1031 by allowing taxpayers to avoid gain recognition on the appreciation of the Fund investment. Investors under 1031 carry over their adjusted bases and do not have a similar opportunity to avoid gain on the appreciation of the replacement property (at least during their lifetimes). Unlike 1031 investors, Fund investors under 1400Z will recognize capital gains on the disposition of the original property in tax year 2026 at the latest—appreciation in the Fund investment will avoid tax if held for 10 years, but capital gain on most of the original sale gain is only temporarily deferred.

While there are some remaining questions, 1400Z creates a powerful new vehicle that allows real estate investors to defer gain on the sale of real property while stimulating investment in economically disadvantaged areas. Many taxpayers will prefer the immediacy of like-kind exchanges under section 1031 over the extended timeline for tax benefits under 1400Z, but patient investors who anticipate a steady increase in the value of their Fund investment will be rewarded in the form of a step-up in basis after a 10-year holding period. This step-up in basis offers a significant advantage over section 1031 by enabling the taxpayer to cash out after 10 years, which provides increased liquidity for retirement or estate planning purposes at a relatively low tax cost.


1 See https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
McLane Middleton, Professional Association
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
McLane Middleton, Professional Association
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions