What are they?
Background
The Qualified Opportunity Zone Program (“QOZ Program”), which established Qualified Opportunity Zones (“QOZs”), was created by the federal government in 2017 as part of the Tax Cuts and Jobs Act. This program is intended to encourage investment in communities across the U.S., principally by providing certain tax incentives in return for committing long-term capital to these communities through investment vehicles called Qualified Opportunity Funds (“QOFs”).
A QOF is an investment vehicle organized as either a partnership or corporation that holds at least 90% of its assets in QOZ property. QOFs can make investments in a wide variety of real estate and new or existing businesses, including commercial real estate, housing, infrastructure, oil and gas ventures and start-up businesses. QOFs can hold single or multiple assets. QOZ property includes interests held by the QOF in a Qualified Opportunity Zone Business (“QOZB”).
A QOZB is a business in which at least 70% of tangible assets qualify as QOZ business property owned or located in a QOZ. At least 50% of the gross income earned by the business must be from the active conduct of the business in the QOZ and generally may not be a “Sin Business.” No more than 5% of the assets of the QOZB can be non-qualified financial property.
understanding eligibility
What is an "ELIGIBLE" gain and an "ELIGIBLE" taxpayer?
A capital gain is eligible for deferral if it is from the sale or exchange of property with an unrelated party (not more than 20% common ownership) and the gain is treated as a capital gain (short term or long term) for federal income tax purposes, including gains from:
- Stocks, bonds, options, hedge funds
- Primary and secondary residences, other real estate
- Businesses, machinery, commercial buildings
- Land, livestock, art, wine, automobiles
QOZ regulations provide that taxpayers eligible to elect gain deferral include:
- Individuals
- C Corporations (including regulated investment companies (RICs) and real estate investment trusts (REITs)
- Partnerships, and
- Certain other pass-through entities
The first day of the 180-day period to reinvest gains into a QOF generally is the date on which the gain would be recognized for federal income tax purposes.
Potential Benefits of Investing in a QOZ
Additional Information
DEFERRAL
If a taxpayer invests the capital gain from the sale of any property into a QOF within 180 days of recognizing the gain, taxes on such proceeds may be deferred until the earlier of December 31, 2026 or the disposition of the QOF interest (many QOF sponsors may give a special distribution to investors prior to the December 31, 2026 date, realizing the end of the deferral period).
ELIMINATION
Investors who hold their investment for at least ten years pay no tax on the appreciation of their QOF Investment upon disposition of such QOF Investment, regardless of the size of the potential profit.
All investments involve risk, and the realization of the benefits is dependent on proper structuring and the structure and performance of the future investments selected. Not all investments will provide all of these benefits.
IMPORTANT DEADLINES
Generally, to receive the QOF Program tax benefits, eligible capital gains must be reinvested in a QOF within 180 days from the sale of an asset. However, the QOZ Program final regulations provide additional flexibility for K-1 partnership gains.
