Contained in the TCJA, qualified opportunity zones are a new tax incentivized investment vehicle aimed at encouraging investment in low-income housing. Here are the highlights:
- If a taxpayer has a realized capital gain, taxpayer can invest the gain in a Qualified Opportunity Fund within 180 days and defer the capital gain. A Qualified Opportunity Fund is an investment vehicle that holds at least 90% of its assets in Qualified Opportunity Zone Property.
- A Qualified Opportunity Zone is a low-income community designated as a Qualified Opportunity Zone. Governors of the states nominate properties, and those nominations are submitted to the Department of Treasury for certification.
- An investment in a Qualified Opportunity Zone can be made in a domestic corporation, partnership or a Qualified Opportunity Business Zone Property. Regardless of the type of investment vehicle, it must be a Qualified Opportunity Business Zone Business. A Qualified Opportunity Zone Business is a trade or business that owns or leases substantially all of its tangible property in Qualified Opportunity Business Zone Property. Among other requirements, the business must generate at least 50% of its total gross income from active business conduct, and alas there is a long list of excluded businesses, including golf courses. Qualified Opportunity Business Zone Property must be acquired after December 31, 2017 and can be new or “substantially improved.” To be “substantially improved” the taxpayer must invest in the property an amount that exceeds taxpayers adjusted basis in the property over the 30 month period beginning with acquisition.
The tax benefits of investing in a Qualified Opportunity Fund increase with the holding period. If the investment is held for 5 years, the taxpayer receives a 10% increase in basis. If the taxpayer holds for at least 7 years, taxpayer receives an additional 5% basis increase. All Qualified Opportunity Fund interests held on December 31, 2026 are taxed. If the Fund continues to be held after December 31, 2026 and the total holding period reaches 10 years, the taxpayer receives a basis step up to the fair market value at that time. Accordingly, all appreciation after December 31, 2026 avoids tax.
Regulations on Qualified Opportunity Funds were recently issued, and we are studying them. Let us know if we can assist if you are considering investing in this interesting new investment vehicle.