Family office OZ investments face a time crunch

Why this is important: Family offices have just over a month to take full advantage of the Opportunity Zones program.

During a panel at Buyout Insider’s Family Office Connect conference on May 22, Kamil Homsi, founder of Global Realty Capital, said investors had not been given enough time to fully understand Opportunity Zone investments and meet looming deadlines, and that efforts were already underway to extend the program to 2032.

Homsi was asked about how to avoid geographic bias in OZ investments, that is, having too much investor money go to OZs in already prosperous cities and regions at the expense of those in more desperate need of investment.

“The only way we can accomplish what you ask for is by extending the program,” Homsi said. “And there is talk right now in Washington. … There are various senators and congressmen that are requesting the program be extended to 2032.”

“Many people in the investment community [were] taken by surprise” by the OZ program, Homsi added. “In the beginning, people were afraid, they were in a state of denial and then slowly became [interested].”  Buyouts previously reported that not many investor dollars have gone into OZs yet.

Since then, Homsi said, only two sets of regulations have been released by the Treasury Department, and with more supposedly coming, family offices and other investors will need more time.

“The deadlines are coming close,” Homsi said.

One of the tax benefits of the Opportunity Zones program is a “step up in basis for capital gains reinvested in an Opportunity Fund.” If an OZ investment is held for five years, 10 percent of it is tax-free. If it is held for seven years, an additional 5 percentage points are added, for a total 15 percent possible tax break.

That part of the 2017 Tax Cuts and Jobs Act sunsets at the end of 2026. That means investors face looming deadlines to apply their 2018 and 2019 capital gains to a qualified opportunity fund in time to take advantage of both of those tax breaks.

“Based on the latest Treasury regulations, a capital gain is viewed as being realized on Dec. 31 of the year it has been made,” explained Brady Meixell of Urban Institute. “From that Dec. 31 date, you have 180 days to roll over that prior capital gain into an opportunity fund.”

That means investors who want to take advantage of the seven-year hold for their 2018 capital gains need to act fast — very fast.

Calculating 180 days from Dec. 31, 2018 gets to June 29 — just five weeks away.

If investors miss that deadline, they cannot apply either of those benefits to their 2018 capital gains.

Next, they must apply their 2019 capital gains to an OZ fund by Dec. 31, 2019, to qualify for the seven-year carry.

If they miss that deadline, investors can still apply their 2019 capital gains to a QOF by June 29, 2020 to get the five-year carry, but they will no longer be able to take advantage of the seven-year carry.

“It’s still a pretty solid set of tax benefits. It’s just not quite the full slate,” Meixell said.

Meixell also said extending the program to 2032 or any other date would require new legislation.

“There’s certainly some formulating, but I think it’s still very early on in those conversations,” Meixell said.  “I think there will be more of a rush when we start getting near the end of the program itself.”

Homsi did not respond to requests for further comment on any efforts to extend the program, and neither did the offices of Sens. Tim Scott (R-South Carolina) and Cory Booker (D-New Jersey), the main champions of the OZ program.

Bloomberg Tax reported in April that the senators want to push back the tax incentives’ start date by one year so more investors can get the full 15 percent tax break, but did not mention any extension until 2032.

“My guess is that it will happen,” Homsi said at the conference about the 2032 extension.