Real Estate
The Tax Cuts and Jobs Act (TCJA) tossed an unwanted rule into Section 1031 by forbidding exchanges of personal property.
But before we move on, let’s clarify one thing: Section 1031 is not an “exchange,” which is defined by Merriam-Webster as a trade. In a tax code 1031 exchange, you generally would
The federal Rehabilitation Tax Credit, or rehab credit, offers significant financial incentives for owners or leaseholders of historic buildings to renovate those structures.1
What’s the big deal? Why are tax credits so exciting?
Tax credits, unlike deductions, reduce your tax bill dollar-for-dollar. If you spend $100,000 and get a 20 percent tax credit, you reduce your tax bill by $20,000. That’s Uncle Sam putting $20,000 in your pocket. And there’s more.
In general, income from renting a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income, and Loss. You should also keep in mind that the definition of a “vacation home” is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS. Tax rules on rental income from second homes can be confusing, especially if you rent the home out for several months of the year and use the home yourself.
The Tax Cuts and Jobs Act included numerous changes for businesses and individuals. One of these was the creation of the Opportunity Zones tax incentive, the purpose of which is to spur economic development and job creation in distressed communities by providing tax benefits to investors.
Low-income communities and certain contiguous communities qualify as Opportunity Zones if a state, the District of Columbia, or a U.S. territory nominated them for that designation and the U.S. Treasury certified that nomination. Using this nomination process, 8,764 communities in all 50 states, the District of Columbia, and five U.S. territories were certified as Qualified Opportunity Zones (QOZs). Congress later designated each low-income community in Puerto Rico as a QOZ effective December 22, 2017.
For a complete list and visual map of census tracts designated as QOZs visit the Opportunity Zones Resources page at the IRS website.
Opportunity Zones offer tax benefits to business or individual investors who can elect to temporarily defer tax on capital gains if they timely invest those gain amounts in a Qualified Opportunity Fund (QOF). Investors can defer tax on the invested gain amounts until the date they sell or exchange the QOF investment, or Dec. 31, 2026, whichever is earlier.
The length of time the taxpayer holds the QOF investment determines the tax benefits they receive:
Deferral of Eligible Gain. Gains that may be deferred are called “eligible gains.” They include both capital gains and qualified 1231 gains, but only gains that would be recognized for federal income tax purposes before January 1, 2027, and that aren’t from a transaction with a related person. To obtain this deferral, the amount of the eligible gain must be timely invested in a QOF in exchange for an equity interest in the QOF (qualifying investment). Once this is done, taxpayers can claim the deferral on their federal income tax return for the taxable year in which the gain would have been recognized if they had not deferred it.Taxpayers may make an election to defer the gain, in whole or in part. For additional information, see How To Report an Election To Defer Tax on Eligible Gain Invested in a QOF in the Form 8949, Sales and other Dispositions of Capital Assets instructions.
A QOF is an investment vehicle that files either a partnership or corporate federal income tax return and is organized for the purpose of investing in QOZ property. To become a QOF, an eligible corporation or partnership self-certifies by annually filing Form 8996, Qualified Opportunity Fund with its federal income tax return. The return, together with Form 8996, must be filed timely, taking extensions into account. An LLC that chooses to be treated either as a partnership or corporation for federal income tax purposes can organize as a QOF.
QOZ property is a QOF’s qualifying ownership interest in a corporation or partnership that operates a QOZ business in a QOZ or certain tangible property of the QOF that is used in a business in the QOZ. To be a qualifying ownership interest in a corporation or partnership, (1) the interest must be acquired after December 31, 2017, solely in exchange for cash; (2) the corporation or partnership must be a QOZ business; and (3) for 90% of the holding period of that interest, the corporation or partnership was a QOZ business.
QOZ business property is tangible property that a QOF acquired by purchase after 2017 and used in a trade or business and:
Leased property may also qualify as QOZ business property. The lease must be a market-rate lease entered into after December 31, 2017, to qualify.
Each taxable year, a QOZ business must earn at least 50% of its gross income from business activities within a QOZ; however, the regulations provide three safe harbors that a business may use to meet this test. These safe harbors take into account any of the following:
Don’t hesitate to call if you have any questions or would like additional information about investing in Opportunity Zones.
The Tax Cuts and Jobs Act has resulted in questions from taxpayers about many tax provisions including whether interest paid on home equity loans is still deductible. The good news is that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.
