Qualified Opportunity Zones under the Tax Cuts and Jobs Act
QO Zones offer incentives for investment in low income communities
The Qualified Opportunity Zone Program (“QO Program”) enacted as part of The Tax Cuts and Jobs Act is a new incentive designed to promote investment in low-income communities by allowing taxpayers to defer, reduce, and potentially exclude gain recognition on certain investments made in Qualified Opportunity Zones (“QO Zones”).
Qualified Opportunity Funds (“QO Funds”)
Investors wishing to utilize the Opportunity Zone Program must invest their gain in a QO Fund. In order to meet the criteria of a QO Fund, 90% of the assets held by the vehicle on the last day of the fund’s taxable year (and the last day of the first six month period of the fund’s taxable year) must be qualified opportunity zone property (“QOZ Property”) within a QO Zone acquired after December 1, 2017.
The Act requires the Treasury Secretary to establish guidance for the certification process of QO Funds, which will likely be administered by the Department of Treasury’s Community Development Financial Institutions Fund (“CDFI Fund”).
What are QO Zones?
The QO Program requires a QO Fund to make direct or indirect investments in a QO Zone. Qualified Opportunity Zones (QO Zones) are defined as certain low-income communities that are experiencing uneven economic development, resulting in pockets of disinvestment and unemployment.
In New Jersey, Governor Murphy nominated 169 low-income tracts in 20 counties for designations a QO Zones. On April 9th, the U.S. Department of Treasury approved Governor Murphy’s designation of such tracts as QO Zones.
Tax Benefits of Investing in Opportunity Zones
The QO Program offers three tax benefits for investing in low-income communities through a QO Fund:
- A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the dates on which the opportunity zone investment is disposed of or December 31, 2026.
- A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% of the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and an additional 5% is held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
- A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
Some important items to note under the QO Program:
- Gains must be reinvested within 180 days in order to qualify for tax deferral under the QO Program.
- There is no “like-kind” requirement as part of the program. An investor could sell a mutual fund and reinvest gains into a QO Fund that will develop real estate in one of the selected census tracts.
- The program is still being formulated. The next step is for the Treasury Department to promulgate regulations for the establishment of Opportunity Funds, the vehicles which QO Zones investments will be made.
We’ve got your back
Like many other aspects of the new tax law, QO Zones can get complicated. With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at firstname.lastname@example.org or 201.655.7411 today.