On November 1, the IRS announced cost of living adjustments for various retirement accounts, including IRAs and 401(k) plans.  The changes are as follows:

  • For the first time since 2013, the IRA contribution limit will increase from $5,500 to $6,000 in 2019. Catch up contributions if you are age 50 or older remain unchanged at $1,000 for IRAs.
  • For 401k plans (and 403(b) plans), the retirement plan contribution amount will increase from $18,500 to $19,000. Catch up contributions for age 50 and older participants remain unchanged at $6,000.
  • The income phase-out for taxpayers making contributions to Roth IRAs will increase from $122,000 to $137,000 for singles and heads of household and for married couples filing jointly, the income phase-out is from $193,000 to $203,000.
  • The limitation on the annual benefit for defined contribution plans (i.e. 401(k) plans and profit sharing plans) will increase from $55,000 to $56,000.
  • The annual compensation limit will increase from $275,000 to $280,000.

Last week, the IRS released proposed regulations regarding investing in Qualified Opportunity Funds (“QOFs”).  Click here for a summary of the QOF regime that was enacted as part of the 2017 Tax Cuts and Jobs Act. The proposed regulations generally address three topics:

  1. The requirements for deferring gain recognition by investing in a QOF;
  2. Rules for corporations or partnerships to self-certify as QOFs; and
  3. The requirements for a corporation or partnership to qualify as a QOF.

Highlights of the proposed regulations include the following:

  • The proposed regulations provide that only capital gains are eligible for deferral. Where a sale results in both capital gain and ordinary income (such as depreciation recapture), a taxpayer can defer only the capital gain.
  • A partnership itself can elect deferral of eligible gain. To the extent the partnership does not elect, a partner in the partnership can elect deferral with respect to the partner’s distributive share of eligible gain.  The partner can make such an election within 180 days of the last day of the tax year in which the gain occurs.
  • The deferral election will be reported on a Form 8949. The self-certification to qualify as a QOF will be reported on a Form 8996.
  • The proposed regulations clarify that the exclusion of gain after holding a QOF investment for 10 years qualifies even after a Qualified Opportunity Zone (“QOZ”) designation expires. This was a concern raised by many commentators based on the statute.
  • Pre-existing entities may qualify as QOFs, subject to certain requirements.
  • A QOF may hold cash and other nonqualified financial property for up to 31 months (a “working capital safe harbor”) if the QOF has a written plan that identifies the property as held for acquisition, construction or substantial improvement of tangible property in the QOZ, a written schedule exists evidencing the use of the property, and the QOF substantially complies with the schedule.
  • The proposed regulations provide further guidance about how to qualify as a “QOZ Business.” In brief:  A QOF must hold 90% of its assets in “QOZ Property.”  QOZ Property is either (1) “QOZ Stock” (stock of a corporation that is a QOZ Business), (2) “QOZ Partnership Interest” (partnership interest in a partnership that is a QOZ Business), or (3) “QOZ Business Property.”  If the QOF invests in a QOZ Business (eg, stock or partnership interests) to meet this requirement, the proposed regulations provide that 70% of the tangible property of the subsidiary corporation or partnership must be held for use in QOZ Business Property.  The leniency of this rule makes it likely that QOF will use subsidiary entities to make investments.
  • The proposed regulations also clarify how a business will qualify as a QOZ business.

The IRS is soliciting comments on the proposed regulations and planning to issue additional regulations.  Investors should try to stay flexible as the rules in this new area may change.  Nonetheless, as the rules become clearer, investors can better evaluate the planning opportunities that investing in QOZs offer.

 

On October 19, 2018, the IRS released Revenue Ruling 2018-29, an eagerly awaited ruling addressing real estate investment in Qualified Opportunity Zones (“QOZs”). In brief, the Revenue Ruling holds that, for purposes of measuring whether a real estate investment is “substantially improved” so that it will qualify as “QOZ business property” and therefore will qualify for favorable tax deferral rules, the taxpayer uses his or her adjusted basis in the building as the measure and ignores his or her basis in the land.

The 2017 Tax Cuts and Jobs Act created an Opportunity Zone Program to encourage investments in economically distressed areas. Taxpayers who invest realized gains in Qualified Opportunity Funds (“QOFs”) (1) get to defer recognition of the gain (until the earlier of the date of sale of the QOF investment or December 31, 2026), (2) get a step-up in basis up to 15% (if the QOF interest is held for five to seven years), and (3) may exclude all of the gain due to the new QOF investment if they hold the investment for 10 years.

A QOF must hold at least 90% of its assets in “QOZ property.” For real estate investors, the investment generally must be QOZ business property, which is tangible property (including real estate) used in a trade or business that is purchased after December 31, 2017, and either the original use of the property began with the QOF, or the QOF “substantially improves the property.” Property is treated as substantially improved if, within 30 months of acquisition, the additions to the tax basis of the property exceed the original basis at the beginning of the 30 month period. In other words, if the investor makes improvements to the property that doubles its basis, then the property will qualify as “substantially improved.”

The statute is complicated and there have been a number of questions about the details of how to implement the QOZ rules. The IRS has issued proposed regulations and will issue more. Nonetheless, the Revenue Ruling is taxpayer-friendly and helpful because it makes clear that one ignores basis in land and uses only basis in the building in order to determine whether the QOZ property is substantially improved and thus qualifies for tax benefits.