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Would-be OZ investors may have wiggle room

Delay is a way of life for all of us.Jim Hamill

It even has inspired the well-known saying “hurry up and wait.” Often the delay frustrates us. Sometimes it relieves us.

The baseball pitcher who has just finished his warm-up routine does not want to learn that rain has delayed the start of the game. The kid who forgot there was a math quiz in school welcomes the announcement that the quiz has been pushed back a day. Both events have happened to me and the joy of the second far exceeded the frustration of the first. Delay can be good.

In December 2017, Congress created a new way to defer paying taxes – invest a capital gain in an opportunity zone (OZ). When you realize a capital gain, a clock starts ticking. You have 180 days to invest that gain in an OZ investment. You may then elect to defer paying tax on the gain.

YouTube has a song called “Jeopardy wait theme.” Many of us know this even if we never watched the show. It’s this annoying song that plays when you are on the clock to make a decision. Be thankful it exists only in TV land and that you choose what you listen to on YouTube.

Tax advisers explained to clients that the decision to invest in an OZ was subject to a strict 180-day time limit. It was in the law. Hurry up and make a decision. The music is playing. The clock is ticking.

But as Monty Python taught us, no one expects the Spanish Inquisition, and we now know no one expects a global pandemic. The fear of insufficient landing boats pushed D-Day from May to June. The fear of winds pushed it from June 5 to June 6.

The fear of leaving our house pushed back the OZ clock. It’s time to hurry up and wait. It’s our new way of life and there’s not even a song for it.

Many taxpayers are the grown-up versions of those kids who forgot there was a math quiz. For them, delay can bring relief. If you had a 2019 capital gain, you may now have until Dec. 31, 2020, to find a suitable OZ investment to defer that gain.

As Miss Grammar would tell us, if some may have a longer time, others may not. So let’s try to find who benefits from procrastination and who does not.

It wouldn’t be the tax law if there was not a general rule and one or more exceptions. And this, my friends, is the tax law.

So start with 180 days from when you realized this 2019 capital gain – you need a calendar and perhaps the use of your fingers and toes to count (especially those of you who righteously worried about the math quiz even when you knew it was coming).

Now wait, folks. If this 2019 gain of yours occurred in a partnership or an S corporation, you can start the counting from any of three dates. One, the date of the gain. Two, Dec. 31, 2019, the end of the entity’s tax year. Three, March 15, 2020, the due date of the entity’s tax return.

Ready to move on? Now, count forward 180 days using the gain date as day zero. Deep breath-calendar-fingers-toes. Still with me?

If the date falls on or after April 1, 2020, you have until Dec. 31, 2020, to reinvest your gain. If not thank you for playing but we don’t have a prize to send you home with.

Is this partnership or S corporation gain? Just pick one of the optional dates to extend yourself to April 1.

This Dec. 31 delay also applies to gains realized in the first half of 2020. A January gain? The July date gets pushed to Dec. 31.

So for those of you who go to dinner and every time the server returns you say, “oh I forgot to look, can you come back later?,” this is your tax break!

Forgot to look for OZ investments? We tax advisers will just keep coming back to see if you’re ready. But we are talking about you and we ain’t coming back after Dec. 31.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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