What is a Qualified Opportunity Zone? Created by the 2017 Tax Cuts and Jobs Acts, Qualified Opportunity Zones (QOZ) were designed to incentivize investment and assist in economic development in low-income communities throughout the United States and its territories. So, what is an opportunity zone? These zones are economically distressed communities throughout the country with a poverty rate of at least 20%. Such areas have been nominated by the state and certified by the Secretary of the U.S. Treasury to be designated as an opportunity zone. Investing in opportunity zones provides tax benefits to investors by allowing a deferral on eligible capital gains.
What Can Investing in a QOZ Do for Me? Investing unrealized capital gains in these zones provides the following benefits, all of which investors can take advantage of:
- Temporary deferral. If you invested in an opportunity zone previously, you may defer tax on any prior gains until the investment in the (QOF) is sold or exchanged, or December 31, 2026, whichever is sooner.
- Reduction in tax gain. Further, the longer the investment is held, the higher the percentage excluded on the deferred gains. If the QOF investment is held for more than 5 years, 10% of gain is forgiven. Holding the investment for more than 7 years bumps the 10% exclusion to 15%.
- Permanent exclusion and basis increase. If the investment is held for more than 10 years, there will be no capital gain on the appreciation in the Qualified Opportunity Zone and the investor becomes eligible for an increase in the basis, equal to its fair market value at the time the (QOF) investment is either sold or exchanged.
How Does the Program Work? Investments into a zone are made via a Qualified Opportunity Fund (“QOF” or “O Fund”). To form a Qualified Opportunity Zone Fund:
- May be a preexisting entity or domestic corporation or partnership established to invest in Qualified Opportunity Zone property;
- Must hold at least 90% of its assets in (QOZ) property. Stock, partnership interests, and tangible property used in a trade or business within the QOZ may be counted towards the 90% requirement;
- May elect QOF status at the beginning on any calendar month by filing Form 8996
- Must meet certification standard set by the IRS and Treasury Regulations
What Constitutes a Capital Gain You Can Invest? There are two possible types of investments into Qualified Opportunity Zone Funds:
- Qualified Opportunity Zone Business Property
- Equity Interest in QOF Subsidiaries or (QOF) Subsidiaries
If investing directly in real property, the property must either be new or substantially improved.
What is a QOZ Business Property? Qualified Opportunity Zones Businesses are domestic corporations, partnerships, or LLCs. To be considered a Qualified Opportunity Zone Business Property the property must:
- Have been acquired from an unrelated party after 2017;
- Whose original use commenced within the Qualified Opportunity Zone or substantially improved the property;
- To be used in a trade or business located within an Opportunity Zone with more than 50% or more of gross income arising from active conduct of that trade or business within the zone;
- With less than 5% of the aggregate adjusted taxis basis being non-qualified financial property, such as stock, debt, partnership interests, options, and other similar properties;
- Which is not a “sin business” (i.e. a country club, gaming facility, private or commercial golf course, etc.)
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Published by Hannah Karraker