Can Qualified Dividends Be Used for Opportunity Zones?

Ever since the Opportunity Zone program came into being, questions have been asked about timelines, approved investment types, and where the federally designated Qualified Opportunity Zones (QOZs) are located.

And, while the program was specifically set up to make use of capital gains from the sale of assets, questions have also been asked about what can be invested in Qualified Opportunity Funds (QOFs). Among these queries are whether qualified dividends can be used for opportunity zones.

The answer here is an emphatic “no.” Dividends—qualified or ordinary—are not capital gains. And capital gains are the only monies that can be invested in QOFs/QOZs.

Defining Dividends

A dividend is defined as a distribution of a corporation’s earnings to shareholders, with the amount and timing determined by the board of directors. Shareholders who own common stock of dividend-paying companies are eligible for dividends, as long as they bought and held the stock before the ex-dividend date. Dividends are a way for companies to thank shareholders for their investments. It’s important to understand that not all corporations pay dividends; instead, many reinvest the profits.

If you own stocks or securities that pay dividends, you’ll receive one of two types:

Ordinary dividends are payments the company makes to you, which are taxed as ordinary income. 

Qualified dividends are also payments made to you, but these are taxed at the lower capital gains rates, as opposed to ordinary income rates.

So, what qualifies as a qualified dividend? Specifically, this type of dividend needs to meet the following IRS requirements:

1. It must be paid by a U.S. company or a qualifying foreign corporation. A “qualifying” foreign corporation must be incorporated in a U.S. possession, is eligible for the benefits of a comprehensive tax treaty with the U.S., or the stock is traded on U.S. stock exchanges.
2. It is not considered a non-qualified dividend by the IRS. In other words, it isn’t paid by real estate investment trusts (REITs), master limited partnerships, money market accounts, or employee stock options. 
3. It must adhere to holding-period qualifications. Specifically, common stock investors are required to hold their shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date. Holders of preferred stock must hold their shares for more than 90 days for a 181-day period that starts 90 days before the ex-dividend date.

The ex-dividend date is the drop-dead deadline by which you must buy shares in order to receive a dividend. Specifically, you need to buy those shares the day before the ex-dividend date to qualify for the dividend payment.

Dividends versus Capital Gains

Now let’s evaluate dividends versus capital gains. The chart below provides a direct comparison of the two. 

Boiling this down, dividends have nothing to do with the sale of a capital asset. Rather, it’s paid to you (at the company’s discretion) out of profits. As such, dividends have nothing to do with Opportunity Zone investments.

Capital Gains Only

It bears repeating: Opportunity Zones are set up to take advantage of the trillions of dollars of capital gains. The idea was that those capital gains could be invested in federally designated lower-income areas to help spur economic revitalization. The investments used are profits from the sale of assets, not qualified dividends, which are very different.

As always, if you are considering a Qualified Opportunity Fund investment, be sure to talk with your financial planner or tax professional for advice.