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“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “
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EVENTS & MEETINGS That Matter.
By Mark Lee Levine, CCIM, LLM, Ph.D. and Libbi Levine Segev, LLM, MSRECM | March.April.19
While the tax benefits of Section 1031 exchanges in commercial real estate are well-known to most real estate professionals, the new qualified opportunity zone program now offers another approach to deferring or eliminating taxable gain.
The Tax Cuts and Jobs Act of 2017, code sections 1400Z-1 and 1400Z-2, created qualified opportunity zones to encourage investment in specific economically distressed areas across the U.S. This new type of investment allows taxpayers to defer or possibly exclude capital gains from taxation.
The opportunity zone refers to investment in a qualified opportunity fund, or QOF. Opportunity zone investing occurs within a fund that is qualified under the code and regulations.
Qualified opportunity zone investments in commercial property can be similar to 1031 exchanges, to defer taxes, but the differences in tax implications can be significant when there is a disposition of the property. The dispositions might utilize an opportunity zone investment, an exchange, or a sale. Although favorable tax benefits may be generated from dispositions that are followed by investments in opportunity zone areas, this approach is only one option. Taxpayers and advisers also should examine tax-deferred exchanges, sales, and other approaches, rather than assuming that an opportunity zone is the best alternative, even if there are potential tax savings.
While this discussion focuses on real estate, related principles and issues may be applicable to investments in qualified opportunity zones in personal property as well. However, the federal tax law no longer allows 1031 tax deferral for personal property; the exchange must involve real estate.
Laws dealing with opportunity zones are being developed. The lack of well-established case law, regulations, and other guidance for investments in qualified opportunity zones creates risks – risks that should be considered carefully before investing in opportunity zones.
Alternatives When Disposing of Real Estate
The 1031 exchange program provides for non-recognition of gain or loss for exchanges of qualified, like-kind real estate. The 1031 deferral does not apply if the property exchanged is inventory property held for sale by the taxpayer.
Imagine that John owns Property X, and he is undertaking an exchange with Jane for Property Y. This is not a qualified 1031 tax-deferred exchange for John if he holds Property X primarily for sale (dealer) or if he holds Property Y primarily for sale.
An opportunity zone deferral also would not be applicable if the property in question is held primarily for sale.
If the exchange was qualified under 1031, the 1031 law allows for certain delays, such as a case where John will transfer Property X (relinquished property) immediately, but will receive the replacement property (Y), sometime in the future, within specific time limits. Opportunity zone rules also allow for a delay to invest funds in the qualified opportunity zone.
Both 1031 exchanges and opportunity zones also have restrictions when some of the parties to the transaction are related.
Deferral or Exclusion of Taxable Income
Another consideration when disposing of property, even by a sale, is the reinvestment of those funds in qualified properties in an opportunity zone. Investing in a QOF is required to gain the tax benefits under the program.
Benefits of investing in a QOF include:
- The seller, if qualified, can defer gain from the sale. For example, a taxpayer selling stock at a gain of $1,000 can defer the tax on such gain by a proper qualified opportunity zone reinvestment.
- If the taxpayer properly invests the gain in a qualified opportunity zone via a QOF, the taxpayer could be allowed an exclusion of up to 15 percent of the deferred gain.
- If the taxpayer holds the investment in the QOF for at least 10 years, all the capital gain generated since the reinvestment can be excluded, assuming all the program requirements are met.
Section 1031 exchanges differ from QOFs in many ways:
- A 1031 investment does not require reinvestment in a specific area of the U.S., as long as it is in the U.S. Alternatively, by definition, the QOF must be in a qualified zone.
- The structure of a 1031 exchange requires a good deal of formality, dealing only with like-kind property. The type of property in a QOF has a broader range that can involve real estate or personal property. However, both 1031 exchanges and QOFs have additional requirements. For example, QOF property must be acquired after Dec. 31, 2017.
- Section 1031 requires an investment in trade or business property, while the QOF has more flexibility.
- In a QOF, only the gain (not the full sales price) needs to be reinvested in a QOF to come within the deferral rule.
- As a rule, under 1031 exchanges, the entity transferring the relinquished property also must be the one obtaining the replacement property. For example, John could not transfer Property X under the 1031 exchange program and then have his corporation acquire the replacement property. A QOF provides more flexibility for the investor who sold, for example, a partnership interest then invested in a QOZ entity.
- Delayed exchanges are permissible in some cases, which allow for the involvement of other parties and possibly an intermediary. As such, they provide 1031 transactions with flexibility. Section 1031 exchanges normally allow for a maximum of 180 days to complete the transaction, generally from the disposition date of the relinquished property, such as Property X, to a reinvestment in the replacement Property Y. The 180-day timing also can apply to the QOF in some cases. However, in the QOF, the seller can take possession and control of the cash from the sale; such cash control is not allowed in a 1031 exchange.
The QOF may have more flexibility for investors, assuming the investor is willing to move to a QOF and away from, in many cases, personal control of the assets. This lack of control also can create some liquidity issues for the investor in the qualified opportunity zone.
Costs in undertaking these transactions include those associated with being involved in a qualified opportunity zone, such as the fees charged by the QOZ and the costs for the use of an intermediary in 1031.
Most dispositions are structured as sales. The sale may be formulated as a cash sale or by an installment sale, allowing the seller to spread income over time as payments are received. But an outright sale has its advantages and drawbacks when compared to dispositions centered around the exchange or QOF.
Each approach to limiting taxes in disposing of property has its benefits under federal income tax laws. While limiting or avoiding taxes is attractive, as well as full exclusion of the gain, selling for cash improves flexibility in investing. Cash normally is available on a traditional cash sale, but not necessarily on a 1031 exchange or the QOF investment.
Other important issues to consider when choosing the form of disposition include determining management issues for the property; refinancing options; dealing with others in the investment; timing of dispositions and acquisitions; control over decisions; and the requirement to stay invested in the qualified opportunity zone to gain tax benefits. The geographic areas to invest in and the type of property to select are additional factors with 1031 and the QOF.
While QOFs add another alternative for taxpayers and planners when considering the best approach to dispose of property, the decision is complex. The taxpayer must carefully weigh all factors, not only the tax benefits, to find the right option for a particular situation.
SEE IT ALL: https://www.ccim.com/cire-magazine/articles/2019/03/opportunity-zones-vs-1031-exchanges/
FROM ME:
Phoenix Commercial Real Estate and Investment Real Estate: Investors and Owner / Users need to really know the market today before making a move in owner user Commercial Properties, Investment Properties and land in Phoenix / Maricopa County, Pinal County / Arizona, as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial Properties and Investment Properties. I am marketing my listings on Costar, Loop-net CCIM, Kasten Long Commercial Group. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also internationalClick here to find out what is a CCIM: https://en.wikipedia.org/wiki/CCIM
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Walter Unger CCIM
Senior Associate Broker
Kasten Long Commercial Group
5110 N 40th Street, Suite 110
Phoenix , AZ 85018
CELL: 520-975-5207
Direct: 602-759-1209
Office: 602-445-4112
Fax: 602-865-7461
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“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “ ARE YOU READY TO SELL OR PURCHASE YOUR INDUSTRIAL / OFFICE OR RETAIL BUILDING OR YOUR LAND in Phoenix, Maricopa County and Pinal County, Arizona, please call me. Office: 602-445-4113, Direct : 602-759-1209 , cell: 520-975-5207 or email me walterunger@ccim.net. … CLICK HERE TO VIEW ALL MY LISTINGS.
Let me know if you are interested in Apartments: CLICK HERE FOR APARTMENTS FOR SALE
CLICK HERE: Arizona Opportunity Zones As We Understand /maps. Interested!!! Please contact me.
History of Arizona from 900 BC – 2017 -Timeline.
8 Reasons You Should Invest in Land
History of Arizona from 900 BC – 2017 -Timeline.
WHY PHOENIX? AMAZING!!! POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”
DOT – LOOP 202 / SOUTH MOUNTAIN FREEWAY / PHOENIX AZ – UNDER CONSTRUCTION
ARIZONA FACTS – YEAR 1848 TO 2013
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
- The average age of the population is 34 years old.
- The health cost index score in this area is 102.1. (100 = national average)
- Here are some of the distributions of commute times for the area: <15 min (22.7%), 15-29 min (36.8%), 30-44 min (25.1%), 45-59 min (8.6%), >60 min (6.8%).
PHOENIX PROJECTED AS NUMBER ONE US HOUSING MARKET FOR 2017
LIST OF ECONOMIC DEVELOPMENT PROJECTS IN PINAL COUNTY, REVISED 2-14-17
Reasons to Consider me for Commercial Referrals – I have the Knowledge and Experience
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Walter Unger CCIM – walterunger@ccim.net – 1-520-975-5207 – http://walter-unger.com
2016 Official Arizona Visitors Guide
Timeline of Phoenix, Arizona history
Facts of Arizona – year 1848 to 2013
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Walter Unger CCIM
Senior Associate Broker
Kasten Long Commercial Group
5110 N 40th Street, Suite 110
Phoenix , AZ 85018
Direct: 602-759-1209
CELL: 520-975-5207
Office: 602-445-4112
Fax: 602-865-7461
CLICK HERE TO VIEW ALL MY LISTINGS
“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “
Also Call me if you need an estimated value of your Property.
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Direct : 602-759-1209, Prefer cell: 520-975-5207, or email me walterunger@ccim.net. CLICK HERE TO VIEW ALL MY LISTINGS.
Check out my professional profile and connect with me on LinkedIn.
Kasten Long Commercial Group tracks all advertised apartment communities, including those advertised by other brokerages. The interactive map shows the location of each community (10+ units) and each location is color coded by the size (number of total units).
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
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The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.