USA - FLORIDA Law and Practice Contributed by: Jeffrey R Margolis, Marc S Shuster, James L Berger and Evan Rosenberg, Berger Singerman LLP
for bonus depreciation. This CARES Act correc - tive provision is retroactive to the effective date of the Tax Cuts and Jobs Act of 2017 (1 January 2018), meaning taxpayers may amend prior year returns to capture the benefit of the corrective action and receive an expeditious refund. Real estate entrepreneurs are engaged in the business of acquiring commercial office buildings trending towards retaining consultants to perform cost segregation studies to maximise available tax benefits associated with depreciation. Tax Cuts and Jobs Act The Tax Cuts and Jobs Act of 2017 added Sec - tion 1400Z-1 and Section 1400Z-2 to the Internal Revenue Code in an effort to encourage private investment in low-income communities desig - nated as Qualified Opportunity Zones (QOZs). As an added incentive for such investment, Sec - tion 1400Z-2 provides favourable tax benefits for real estate investors (and other investors) with eligible capital gains who invest in QOFs. The Opportunity Zone legislation was conceived by congress as an economic development tool intended to incentivise the migration of equity capital into these designated areas for purposes of the formation and establishment of new busi- nesses, the development and redevelopment of real estate, and other forms of economic stimuli, with the ultimate goal of job creation and poverty reduction in the QOZs. The tax incentives poten - tially available to investors with eligible capital gains willing to invest in these QOZs by way of investment vehicles known as QOFs include temporary deferral of income taxation on such eligible capital gains, elimination of a portion of the deferred gain via a basis step-up, and the exclusion from gross income of all post-acquisi - tion capital appreciation in the QOZ investment.
For real estate investors (and other investors) to achieve complete deferral of gain under Section 1400Z-2(a), only an amount up to the gain on the real property (or other qualifying property) sold must be reinvested in a QOF. There has been significant activity in the real estate sector in this area. Income Tax Rates and Timing With respect to effective income tax rates, indi - vidual investors can structure their ownership of US real property so as to be eligible for long- term capital gains treatment on gain realised upon sale. This rate is generally 20% under cur - rent law (exclusive of the additional 3.8% tax on net investment income), subject to a 25% rate applicable to certain depreciation recapture (which is an adjustment to reflect the fact that cost recovery deductions during the ownership phase may offset ordinary income from other activities). In terms of timing of the taxable event upon a sale, the continued availability of deferral pur - suant to a “like-kind exchange” of real property for replacement real property can provide mate - rial tax benefits to an investor perpetuating its investment in the form of real property. There is no ceiling on the duration of this deferral, allow - ing multiple like-kind exchanges over an indefi - nite period until the investor chooses to mon - etise its investment. If an individual taxpayer dies owning replacement real property acquired in “like-kind exchange”, there is a step-up in basis at death. This results in the elimination of all the deceased taxpayer’s deferred gain, which can provide material tax benefits to the heirs of the deceased taxpayer.
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