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 their investment.
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
The 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:
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.
Qualified 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:
The IRS 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:
It is 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 Investments
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 options!
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