This article was originally published in the July 2018 issue of Connect Magazine.
A Tri-City native, Pasco High School graduate, and Brigham Young University alumnus, Travis joined Blodgett, Mickelsen & Adamson in 2010, where he specializes in helping businesses and individuals plan ahead to maximize tax benefits.
What are “qualified opportunity zones” and why should an investor be aware of them?
Qualified Opportunity Zones are geographic areas that have been designated as economically distressed and are eligible for tax benefits under the December 2017, Tax Cuts and Jobs Act. Taxpayers who realize capital gains can then choose to invest their realized capital gains into Qualified Opportunity Zone Funds that operate a trade or business in one of these zones. Investing in the zone allows a taxpayer to defer the tax on their capital gain until 2026, exclude a portion of their capital gain from tax altogether, and potentially escape all taxation on the appreciation in their new investment. We have three separate zones here in the Tri-Cities area, and several additional zones throughout the region. Overall, there are over 8,700 zones throughout the country.
Have investors been doing these deals in our area?
I mentioned that the law was passed, with the rest of the Tax Cuts and Jobs Act, in late 2017. While this is true, the geographic zones weren’t finalized until the summer of 2018, and the language in the new law left a lot to be clarified. The IRS has released multiple rounds of guidance on this new tax benefit, so we are beginning to see more activity as the ability of investors to assess the risks and benefits of investing in a Qualified Opportunity Zone has increased.
What type of investors do these deals make most sense for?
The great thing about this new legislation is that it can provide tax savings for so many taxpayers. You don’t need to live in or even near a Qualified Opportunity Zone to participate. The type of capital gain you originally realize, and that subsequently gets invested into a zone, isn’t restricted to real estate gains or any one type of capital gain. This works great for retiring business owners, property owners looking to diversify, or even holders of highly appreciated stock. This kind of tax deferral and potential tax exclusion hasn’t been available for many of these types of gains in the past.
Have there been pitfalls or learning opportunities for those who have used this strategy?
There are a lot of things to watch out for. The rules that have been released are nuanced, and are not always intuitive. The types of investments taxpayers can make into a zone that qualify for the benefits are where most potential investors get tripped up.
What do you foresee in the future for this legislation? Do you have any words of advice for someone interested in it?
I think the IRS will continue to provide some guidance in the short-term. It feels like we’re 85% of the way there on the current rules. I hope we will see an expansion of the program so that it can be available on an ongoing basis, similar to the deferral options available to taxpayers under the IRC 1031 like-kind exchange rules. I would recommend that any potential investor in a Qualified Opportunity Zone Fund develop a relationship with a professional advisor who can step in to let them know when an idea like this makes sense. And because this is new legislation, I think it is especially important for potential investors to maintain relationships with professionals who understand the new laws and who monitor new developments.
Travis Adamson, Partner with Blodgett, Mickelsen & Adamson