Wealth Planning – Qualified Opportunity Zones: What you Should Know

Wealth Planning Qualified Opportunity Zones

Keys

  • The Qualified Opportunity (QO) Zone program, created by the 2017 Tax Cuts and Jobs Act, incentivizes long-term investment in low income and economically distressed communities by deferring capital gains tax when taxpayers invest those gains into QO Funds.
  • A taxpayer with realized capital gains from an unrelated party has 180 days to invest in a QO Fund.
  • An investor can defer their gain until whichever event occurs first: 1) the sale of the QO Fund interest, 2) the QO Fund ceases to qualify or 3) December 31, 2026. The original deferred gain is reduced based on how long the QO Zone Fund interest is held, and post-acquisition appreciation on the QO Fund interest is permanently excluded from tax if the QO Fund interest is held for 10 years or longer.
  • It is important to work with us on the details of this program so that you fulfill all of the requirements to maximize your tax savings.

FAQ’s

What is a Qualified Opportunity Zone?

A Qualified Opportunity Zone (QOZ) is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as QOZs if they have been nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service (IRS).

How does this program work?

To defer a capital gain, a taxpayer has 180 days from the date of the sale or exchange of appreciated property to invest the realized capital gain dollars into a Qualified Opportunity Zone Fund. The fund then invests in Qualified Opportunity Zone Property.

The taxpayer may invest the return of principal as well as the recognized capital gain, but only the portion of the investment attributable to the capital gain will be eligible for the exemption from tax on further appreciation of the Opportunity Zone Investment, as explained below. The Opportunity Zone program allows for the sale of any appreciated assets, such as stock, with a reinvestment of the gain into an Opportunity Zone Fund. There is no requirement to invest in a like-kind property to defer the gain.

Note that a taxpayer who receives a reported capital gain from a flow-through entity, such as a partnership, S-corporation, or a trust/estate, has 180 days from the end of the calendar year to make an investment in a Qualified Opportunity Zone Fund, regardless of how early in the calendar year the entity itself realized its gain. For example, if a partnership entity realized a capital gain in March, each partner’s 180-day triggering date will be December 31 of the same year and each partner will have until approximately June 28 of the following year to make their Qualified Opportunity Zone investment.

What is a Qualified Opportunity Zone Fund?

A Qualified Opportunity Zone Fund is any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property.

Similar to other investments, an investment in an Opportunity Zone Fund may increase or decrease in value over the holding period. In addition, income may be paid on this investment. Given that the purpose of the program is to improve particular areas, it is expected that the fund will continue to invest in the improvement of the property in which it is invested. Cash flow may occur once the property improvements are complete and the property is leased or sold to third parties.

Since Qualified Opportunity Zone Funds are new income tax planning tools and are new investment options for taxpayers, these investments may involve risk. Like many other types of investments, the risks may potentially include market loss, liquidity risk, and business risk to name just a few. Because this investment may not be appropriate for all investors, consult with your financial advisor before pursuing such an investment to determine if this fits with your risk profile and diversification of your investments.

How does investing in a Qualified Opportunity Zone Fund save taxes?

An Opportunity Zone Fund investment provides potential tax savings in three ways:

  1. A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180 day period beginning at the date of sale/exchange, they invest in a qualified opportunity fund. Any taxable gain invested in an Opportunity Zone Fund is not recognized until December 31, 2026, (due with the filing of the 2026 return in 2027) or until the interest in the fund is sold or exchanged, whichever occurs first. In addition, the deferred gain can be further reduced as described below.
  2. A taxpayer who defers gains through an Opportunity Zone Fund investment receives a 10% step-up in tax basis after five years and additional 5% step-up after seven years. Note that to take full advantage of the 15% step-up in tax basis, the taxpayer must have invested by December 31, 2019. When the tax is triggered at the end of 2026, the taxpayer will have held the investment in the fund for seven years, thereby qualifying for the 15% increase in tax basis.
  3. Remaining in the qualified opportunity fund for at least ten years results in the cost basis of the property being equal to the fair market value on the date of sale/exchange (potential to lower cost basis but does not eliminate the gain recognition event on 12/31/2026).

Where can I find more information?

We are here for you to answer your questions about wealth planning and qualified opportunity zones. Please check out our tax planning service and contact us today.

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