Qualified Opportunity Zones Offer Rare Tax Savings
In order to encourage investment in distressed communities, Congress included in the Tax Cuts and Jobs Act (TCJA) significant tax benefits for investments in so-called Qualified Opportunity Zones (QOZs). The new law allows eligible taxpayers to defer taxation of gain that is reinvested in a QOZ. They can also exclude entirely from taxation up to 15% of the deferred gain and 100% of any post-acquisition gain realized from the sale of the QOZ investment if certain holding periods are satisfied. By understanding the ins and outs of QOZs, eligible taxpayers can take advantage of the new provisions to reduce their tax bill.
Spurring investment
Lawmakers included QOZs in the TCJA to spur capital investments in distressed areas. These areas have been designated within 8,700 low-income communities throughout the U.S. Investors can form private investment vehicles, known as qualified opportunity funds (QOFs), to develop or redevelop projects in these zones. As an incentive, the TCJA allows QOF investors to defer short- or long-term capital gains realized on a sale or disposition of a capital asset if they reinvest the gains in a QOF.
The tax on the reinvested gain is deferred until either the investment in the fund is sold or exchanged, or until December 31, 2026, whichever comes first. Further, the investor can avoid tax in three potential ways:
- 10% of the reinvested gain if the investment in the QOF is held for at least five years
- 15% of the reinvested gain if the investment in the QOF is held for at least seven years
- 100% of any post-acquisition gain realized from the sale of the QOF investment if that investment is held for at least 10 years
What is QOF?
In general, a QOF is a corporation or partnership that owns a business (or businesses) located in a QOZ. Specifically, a QOF is a corporation or partnership whose assets are composed primarily (at least 90%) of QOZ property acquired after December 31, 2017. A QOZ property can take several forms: (1) tangible property used in a trade or business located in a QOZ; (2) stock in corporations that operate a QOZ business; and (3) interests in partnerships that operate a QOZ business. Finally, a QOZ business is a trade or business in which at least 70% of the property owned or leased by the business is located in a QOZ, and which derives at least 50% of its gross income from trade or business activities conducted in a QOZ.
Eligible taxpayers
Only eligible taxpayers may take advantage of the tax benefits associated with opportunity zones. Eligible taxpayers are individuals, C-corps, RICs, REITs, partnerships, S-corps, trusts, and estates.
Wondering how you can participate?
Investing in QOZs allows eligible taxpayers to reap significant tax benefits that are available for the first time ever. If you’re considering one of these investments, the tax professionals at Weaver can help you make the most of the opportunity by advising you on the intricacies of the QOZ rules.
Browse our services related to real estate and request a consultation to learn more about saving on your tax bill. For more information on Opportunity Zones, check out our post about the proposed regulations.