April 1, 2019
Congress established qualified opportunity zones (QOZs) to connect private investors with economically-depressed communities across America. This incentive creates a symbiotic relationship between the two parties; the influx of cash boosts the economies of low-income populations, and investors receive a tax benefit in exchange. While these types of tax incentives have been around for years, this program is the first of its kind at the national level, and it has a few quirks that can be confusing. Let’s hop in and go over a few of the most commonly ask questions about QOZs.
QOZs are economically-distressed communities that were nominated for QOZ designation by their state and subsequently certified by the Secretary of the U.S. Treasury. The U.S. Department of the Treasury keeps an updated list of approved QOZs here.
For how long will QOZ designations remain in effect?
Distressed communities that were granted QOZ designation will remain QOZs until December 31, 2028.
How can one invest in a QOZ?
To receive the tax benefits, taxpayers must invest their realized capital gains into an opportunity zone fund within 180 days of the sale. Taxpayers cannot invest into a QOZ directly; they must utilize an opportunity zone fund.
What are opportunity zone funds?
Opportunity zone funds are intermediary investment vehicles structured as partnerships or corporations. They must hold at least 90% of their property in QOZs or in “QOZ businesses,” which you can read more about here.
Who can create an opportunity zone fund?
There are no restrictions on who can form an opportunity zone fund. Existing partnerships, new corporations, or single investors can form opportunity zone funds as long as (1) their entities are organized as corporations or partnerships, and (2) they invest in QOZ property. The election to become an opportunity zone fund can be made on Form 8996 which is filed annually with the entity’s tax return.
What compliance requirements do opportunity zone funds have?
Opportunity zone funds must file Form 8996 each year to certify that they meet the qualifications. This form also verifies that the entity’s QOZ investment percentage is at 90% or above.
How should opportunity zone funds invest their property?
Funds can invest in two different manners. (1) They can support QOZs directly by investing their own capital into businesses that are located in QOZs. (2) They can make equity investments into “QOZ businesses.” QOZ businesses must hold substantially all of their tangible property in a QOZ. No matter what, the original use of the property in the QOZ must commence with the opportunity zone fund. In other words, an opportunity zone fund cannot purchase equipment already located and in use in a QOZ and expect for its investors to receive the tax deferral benefits of QOZ investment.
How quickly should opportunity zone funds invest their property into QOZs?
The proposed regulations have not explicitly stated how quickly funds should invest into QOZs once they receive capital. However, the 90% test must be satisfied on the last day of the first 6-month period of the fund’s taxable year, and on the last day of the fund’s taxable year.
Can opportunity zone funds invest in multiple opportunity zones?
Yes, as long as at least 90% of their assets are invested in QOZs.
What benefits will investors receive?
Investors will receive up to three perks for investing in a QOZ: (1) a temporary deferral of capital gains that are reinvested into an opportunity zone fund; (2) a step-up in basis of the deferred capital gains; and (3) a permanent exclusion of capital gain income that results from the sale of an investment held in an opportunity zone fund for at least 10 years.
What happens when investors sell their QOZ investment?
The tax deferral provided by this incentive program will end once investors sell their QOZ investments. The only way they can continue to defer their gains is if they reinvest those proceeds into other opportunity zone funds.
When was this tax incentive passed? And when is it effective?
The QOZ incentive was written into law with the passage of the Tax Cuts and Jobs Act of 2017, and it became effective immediately. Unfortunately, the IRS has not yet finalized how it interprets the law. Late last year, the IRS released proposed regulations that clarified how the Federal government would implement the new law, but the final regulations are still forthcoming.
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We expect the IRS to issue additional guidance about QOZs and to finalize its proposed regulations at any time. Even though some key questions about this incentive program remain unanswered, you should consider jumping on this investment opportunity. It is a chance for you to make tax-deferred, long-term investments that will support your long-term tax saving goals. Deferring a gain may be a great financial move for you to make, but keep in mind that this is not a universal rule; gain deferral will not be right for every taxpayer. It’s important that you look at your financial standing using a multi-year outlook and make the decision that will save you the most taxes over time. If you have questions about QOZs or would like for us to assess whether a QOZ investment is good for you, contact us today. We look forward to speaking with you soon.