Pending Legislation: HR 970 of 2021
On February 11, 2021, U.S. Representatives Tim Burchett (TN-02) and Henry Cuellar (TX-28) introduced a new bill to the House Ways & Means Committee called the “Opportunity Zone Extension Act of 2021” (H.R.970). H.R.970 very simply proposes to replace the date “December 31, 2026” with “December 31, 2028” in Section 1400Z-2 of the Internal Revenue Code.
Why is this significant?
If it passes, here is what it means for Qualified Opportunity Fund (QOF) investors and investments:
- Investors can defer paying tax on qualified capital gains invested into a QOF until their tax return due date in 2029. That is a two (2) year extension to the current deferral period end date.
- Investors can benefit from an extra five percent (5%) reduction in their tax liability on capital gains invested into a QOF. The existing law states that tax liability is reduced by ten percent (10%) if a qualifying investment in a QOF is held for five (5) years and an additional five percent (5%) if held for seven (7) years. However, under the current law the 7-year hold period is no longer available because it must occur prior to the deferral period end date, which is presently less than 7 years from now (December 31, 2026). By extending the deferral period end date to December 31, 2028, the 7-year hold period is back on the table if a QOF investment is made by December 31, 2021. Investors can thus take advantage once again of up to a full fifteen percent (15%) reduction in their tax liability.
- Investors would have an additional two (2) years to make qualifying investments into a QOF and still receive a ten percent (10%) reduction in their tax liability. As stated above, investors can receive a 10% reduction in tax liability if their qualifying investment is held in a QOF for 5 years prior to the deferral period end date. Under the current law, investors have until December 31, 2021 to invest in a QOF and hold it for 5 years before the deferral period end date of December 31, 2026. By extending the deferral period end date until December 31, 2028, qualifying investments made into QOFs on or prior to December 31, 2023 are still eligible for the 10% reduction in tax liability.
The bottom line is that H.R.970 would give investors an extra two (2) years to both (i) pay tax on capital gains, and (ii) make investments which can qualify for a 10% reduction in tax liability. And, it gives investors another opportunity to reduce their tax liability by an extra 5% (15% total) if they invest their qualifying capital gains in a QOF prior to December 31, 2021.
Let’s all work together and get Congress to pass HR 970!