Qualified Opportunity Zones

A Qualified Opportunity Zone, also known as an Opportunity Zone, is an economically-distressed low-income community where new investments may be eligible for preferential tax treatment. Communities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury.

Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act (“the Act”) on December 22, 2017.

Opportunity Zones are designed to stimulate economic development and job creation in economically-distressed communities.

Anyone can invest in Opportunity Zones. However, only investors with realized capital gains from the sale or exchange of ANY capital asset who want to defer and potentially eliminate a significant portion of their capital gains tax liability can invest in Opportunity Zones.

For investors with realized capital gains, this program offers a powerful new tax advantage, and a vehicle to funnel much needed resources to distressed communities across America.  

Investing realized gains into Opportunity Zones through Qualified Opportunity Funds ("QOF") can provide you with an ability to defer capital gains taxes and qualify for a step-up in basis by 10%, as long as you hang on to the QOF investment for at least five years. The basis in your original asset could increase by an additional 5% if you hold the QOF investment for at least seven years, meaning you could exclude up to 15% of your original realized gain from taxation. Additionally, If you hold the QOF investment for at least 10 years, you could be eligible for a permanent exclusion from having the gains on your QOF investment taxed when you sell your QOF investment.

A Qualified Opportunity Fund (also known as “Opportunity Fund” or “QOF”) is an investment vehicle, set up as either a partnership or corporation, for the purpose of reinvesting investor’s realized gains into eligible Qualified Opportunity Zone Property (“QOZ Property”). This could include stock, partnership interest or business property situated within a Qualified Opportunity Zone. Investments in QOZ Property can only be made through Qualified Opportunity Funds.

To become a Qualified Opportunity Fund, an eligible taxpayer (Opportunity Fund) self-certifies.  No approval or action by the IRS is required. To self-certify, the taxpayer (Opportunity Fund) completes a form (this form is to be released summer of 2018), and attaches that form to the Fund’s federal income tax return for the taxable year.

The Tax Cuts and Jobs Act restricts the availability of tax-deferred exchanges under Section 1031 of the Internal Revenue Code to exchanges of real property only, which may increase the attractiveness of Opportunity Zone investing to taxpayers holding appreciated personal property that no longer are eligible for Section 1031 treatment due to the passage of the Act. We outline more details comparing Opportunity Fund Investing and 1031 Exchanges below.

As with other tax-driven programs, the Opportunity Zone Program ("OZP") has rules. Failure to follow them could result in an unexpected tax bill. For example:

• The only way you can invest your gain in a Qualified Opportunity Zone is through a Qualified Opportunity Fund (“QOF”).
• Only the investment of your capital gains from any capital asset sale (or exchange) to an unrelated third party will be eligible for deferment of, and reduction in, capital gains taxes due. If the investment in an Opportunity Zone Fund is held for at least ten years, it is eligible for a permanent deferral opportunity for any appreciation in the QOF investment.
• You must invest that gain within 180 days from the closing of your sale or exchange. If you sell the stock on Jan. 1, you have until June 30 to reinvest the gain. A Qualified Intermediary is NOT required.
• Although not mandatory, to maximize your benefits you should hold the QOF investment for seven years prior to Dec. 31, 2026.  You will need to make your QOF investment prior to 12/31/2019 in order to maximize the tax benefit. And you will need to hold that QOF investment for a minimum of 10 years to receive maximum tax benefits.

Clarifying regulatory guidance is expected during the summer of 2018 from the U.S. Treasury/IRS. Because December 31, 2026 is the outside date of tax deferral through an Opportunity Fund investment, the earlier an investment is made, the longer the tax can be deferred. It is for this reason that several prospective Qualified Opportunity Fund Sponsors and tax professionals are actively working to provide recommendations as to the scope and content of necessary guidance. If you would like to stay informed on any new information released regarding the Opportunity Zone Program, please subscribe to our blogs where we will be dissecting and distilling this information for all of our subscribers.

Opportunity Fund investments may serve as the catalyst for positively transforming targeted communities.  However, they might not achieve the desired result without additional requirements, guidance, and incentives from state and local governments.

QOF investments carry market risk similar to any other real estate investments. All of your capital invested in a failed project (via your QOF investment) is at risk regardless of the OZP’s other benefits.

Over the next few months, the US Treasury Department/IRS will be providing more details, including additional legal guidance, on this new program.  Interested investors are encouraged to educate themselves about the the Qualified Opportunity Zones Program. Updated information will be for you on our site once it is released, so subscribe to our blog now to make sure you stay current!