Fall 2019

Opportunity Zone Investments

Varun K. Marneni, CFP®

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The Investing in Opportunity Act (the “Act”) came with the enactment of the Tax Cuts & Jobs Act of 2017. The Act provides investors a unique investment opportunity with preferential tax treatment.*

What is a Qualified Opportunity Zone?
A Qualified Opportunity Zone (“QOZ”) is a low-income urban or rural community in the U.S. or its territories where investments into the distressed area may be eligible to receive preferential tax treatment. The Act created this QOZ program to spur private sector investment into these areas as an economic development tool.

The Governor of every U.S. state and territory had the opportunity to nominate up to 25% of its low-income census tracts to be certified as QOZs. Governors were also given discretion to include moderate-income census tracts adjacent to low-income tracts for up to 5% of their nominations. In total, there are now over 8,700 QOZs eligible for participation in this program (as of April 2019).

What is a Qualified Opportunity Fund?
Qualified Opportunity Fund (“QOF”) is an investment vehicle organized as a corporation or partnership for the specific purpose of investing in QOZ property. QOFs must hold at least 90% of assets in QOZ property, not including other QOFs, and will be tested semiannually for compliance.

What are the tax benefits of investing in Opportunity Zones?*
Tax deferral
Any capital gains reinvested into an opportunity zone within 180 days of realization are not taxed until the 2026 tax year. If an investor sells a QOF prior to 2026, and does not reinvest into another QOF within 180 days, the deferred capital gains will be considered taxable during that tax year.

Potential tax reduction
For the 2026 tax year, taxes on the original deferred gain are reduced based on the holding period of the QOF:

  • 15% reduction if held for 7 years
    (investments made by 12/31/2019)
  • 10% reduction if held for 5 years
    (investments made by 12/31/2021)

Gains excluded if held long enough
Any capital gains generated from investments in QOFs are exempt from taxation, if the investment in the QOF is held for at least 10 years and is realized prior to January 2048.

The information provided is not a substitute for your understanding of the information, and the tax consequences relative to this matter. This is not individualized advice, and you should consult professionals, including tax professionals, about individual circumstances before making any decision or taking any action that may have tax consequences. Raymond James & Associates, Inc. and the Alternative Investments Group (Raymond James) is not rendering accounting, business, financial, investment, legal, tax or other professional advice or services. Qualified Opportunity Zone investments can be highly illiquid, are speculative, and may not be suitable for all investors. Such investing is only intended for experienced and sophisticated investors who are willing to bear the high economic risks associated with such an investment. Investors should carefully review and consider potential risks before investing. Certain of these risks may include: risks related to the uncertainty of and compliance with the Qualified Opportunity Zone tax regime rules; loss of all or a substantial portion of investment; lack of liquidity; restrictions on transferring interests in any Qualified Opportunity Zone fund; for privately placed Qualified Opportunity Zone funds, less regulation and higher fees than mutual funds; and investment manager risk. Prospective investors of any investment should refer to the specific fund’s offering memorandum and operative documents, which will fully describe the specific risks and considerations associated with a specific investment. While we are familiar with the tax provisions of the issues presented here, as Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.

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