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?*
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:
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.
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