More than 8,700 tracts were chosen with the intent to improve underserved communities. Nearly 80 percent of these QOZs are in urban and rural communities. By investing in QOZs, investors can defer realized capital gains from prior investments. Tax benefits include the reduction, deferral and elimination of capital gains taxes. With the right structure, investors can compound wealth tax-free until 2047. Past gains can come from public and private investments.
Unlocking capital in low cost basis investments can be effectively reallocated into impact investments. These investments can promote new development, micro economic growth and job creation.
“Opportunity Zones in the next tax reform law, can encourage support for parts of America that continue to struggle with poverty and job growth”
–Jamie Dimon, CEO, J.P. Morgan Chase (Axios.com, 3/21/18)
If a taxpayer invests capital gains from the sale or exchange of property with an unrelated person in a Qualified Opportunity Fund within the 180-day period beginning on the date of the sale or exchange, the investor can elect to defer the gain from the sale or exchange. Investor’s basis in the Qualified Opportunity Fund is initially zero but will be increased by: (a) 10% of the deferred gain if the investment is held for five years by December 31, 2026, (b) an additional 5% of the deferred gain if the investments are held for seven years by December 31, 2026. Proposed regulations confirm that the following investors can defer gains under the QOZ statue:
Any capital gain from the sale or exchange of property by a U.S. taxpayer that is invested in a Qualified Opportunity Fund within 180 days of sale of such property is excluded from gross income until earlier of the date the investment in the QOF is sold or December 31, 2026. The rules provide that only the gain can be reinvested into the Qualified Opportunity Fund and be entitled to tax benefits. The gain deferred can be any capital gain, including:
- Collectible Gains
- Short-term capital gains
- Long-term capital gains
- Net Section 1231 gains
- Gains from sales of securities
- Unrecaptured Section 1250 gains
- Capital gain net income from IRC Sec. 1256 contracts
Milestones & Trigger Events
A gain is eligible for deferral if it is from the sale or exchange of property with an unrelated party (less than 20%) and the gain is treated as a capital gain for federal income tax purposes, including:
- Short term and long-term capital gains
- Unrecaptured section 1250 gains
- Net gain on section 1256 contracts for a taxable year
- Potentially section 1231 gains treated as capital gains
Opportunity Zone investments must be made through investment vehicles called Qualified Opportunity Funds (QOF). A QOF is a self-certified investment vehicle organized as a partnership or corporation to invest in a single or multiple eligible asset(s) in an QOZ.
A QOF must hold at least 90% of its assets in a QOZ property or business. Property is defined to include the following:
- Qualified Stock
- Qualified Business Property
- Qualified Partnership Interests
QOFs can own business property directly or through stock and partnership interests in QOZ businesses. A QOF must make substantial improvements equivalent to the property’s basis excluding land.
QOFs are assessed every six months for compliance with the 90% test, failure results in the QOF paying a monthly underpayment penalty. QOF are limited to the following entity types:
- S Corporations
- Partnerships (GP, LP)
- Real Estate Investment Trusts (REITs)
- Certain other pass-through entities