Opportunity Zones allow Americans to combine their
patriotism with their love of tax breaks.
The Opportunity Zone Provision gives taxpayers who have invested in the
sale or exchange of a property in a Qualified Opportunity Zone Fund (QOZF) the
opportunity to elect or defer paying taxes on the capital gains until they sell
The Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, which defines Opportunity Zones (OZ) as low-income census tracts that have been nominated by governors and certified by the U.S. Department of the Treasury. This stimulus program invites investors to put their capital to work in areas that have struggled to bounce back from The Great Recession or have never had the opportunity to grow. This article will define Opportunity Funding and offer guidance on how to target qualified OZ investments.
Investor Benefits from Qualified Opportunity Zone Fund Investments
innovative approach to spurring long-term private sector investments in
low-income communities is available in over 8,700 Opportunity
Zones in every state and territory. Investors can claim the QOZF tax
advantage in the following ways:
- Investors can defer tax on any prior gains invested in a QOZF until the earlier of the date on which the investment in a QOZF is sold or exchanged, or December 31, 2026.
- If the QOZF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain.
- If held for more than 7 years, the 10% becomes 15%.
- If the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOZF investment equal to its fair market value on the date that the QOZF investment is sold or exchanged.
The IRS states that all types of capital gains are eligible for the Opportunity Zones tax incentives through the use of Opportunity Funds, which invests at least ninety percent of its assets in Qualified Opportunity Zone Property. It is important to note that ordinary gains do not meet the qualification test. Furthermore, while a partnership may elect to defer part of all of a capital gain, the deferred portions of the gain will not be included in the distributed shares.
Opportunity Zone Funds (QOZF) are subject to specific regulations
as set forth by the IRS, namely the types of gains that may be
deferred, the timeline by which the amounts by invested, and how investors may
elect to defer specified gains. Here is a snapshot to get you started:
- These investment vehicles must be set up as a
partnership or a corporation (LLCs do qualify).
- Qualified Opportunity Zone Funds are limited to
the 50 states, DC, and U.S. territories.
- As long as they meet conditions, pre-existing
entities can be eligible as funds or businesses.
- Opportunity funds may identify both the taxable
year in which it becomes a QOZF and the first month in that year to be treated
as a QOZF.
- A QOZF must hold at least 90% of its assets in
qualified opportunity zone property.
- Taxpayers may hold Opportunity Fund interests
invested in those zones and step up the basis of their Opportunity Fund
investments to fair market value if they hold the investments for ten years,
past the OZ expiration in 2028.
defines eligible Opportunity Zone Property as QOZF stock, QOZF partnership
interest, or QOZF business property. Besides being located and operated in a
QOZF, qualified opportunity property must also be new to the entity and abide
by the following requirements:
- The acquired property must undergo substantial
improvement equal to the Opportunity Fund’s initial investment into the
existing property over 30 months.
- At least 50 percent of the gross income of a
qualified opportunity zone business must be derived from the active conduct of
a trade or business in the qualified opportunity zone.
- A substantial portion of the intangible property
of an opportunity zone business must be used in the active conduct of a trade
or business in the qualified opportunity zone.
- Less than 5 percent of the aggregate adjusted
basis of the entity is attributable to nonqualified financial property.
important to note that specific trades and businesses cannot qualify as
opportunity zone businesses, including, any private or commercial golf course,
country club, massage parlor, hot tub facility, suntan facility, racetrack or
other facility used for gambling, or any store the principal business of which
is the sale of alcoholic beverages for consumption off premises.
Targeting Qualified Opportunity Zone
To be able to invest in a QOZF, you must have a qualified gain
(as noted above) from a previous sale to an unrelated party. A taxpayer then
has 180 days from the date of the previous sale to invest in a QOZF. The
investment must be made through a cash contribution and may consist of both
tax-deferred (the previous gain) and non-tax deferred funds (additional amounts
you wish to invest). Any cash contribution made of non-tax deferred funds will
not receive the tax benefits noted above.
If you have allocated a gain from an asset sold within a
pass-through entity, your 180-day investment window defaults to starting on the
date of the pass-through entity’s tax year-end. Alternatively, taxpayers can
elect to have their 180-day window begin on the actual date the partnership
recognized the gain.
If you’ve decided to invest in a QOZF, understanding the
landscape of the opportunity zone will help you assess the trajectory of growth
for that area. Steve Glickman, the co-founder of the Economic Innovation Group
thinktank that designed Opportunity Zones, developed an Opportunity Zone
Index to help anxious investors take the next step.
Taxpayers must act soon to take advantage of this
opportunity. According to the TCJA, investors have until 2020 to reap the full
tax benefits of investing in a QOZF. If you’d like to learn more about
investing in a QOZF, give us a call. We can help you better understand your