The Tax Cuts & Jobs Act of 2017 created a method to provide preferential tax treatment to taxpayers who invest in economically distressed communities designated as Qualified Opportunity Zones. The tax benefits of this type of investment include:
- Deferral of the current year tax on gains through the earlier of 2026 or when the investment is sold
- Step up in basis of between 5 – 15% for short-term investments, which reduces the tax realized from (1)
- Step up in basis to fair market value if held for ten years
The tax benefits are triggered by investing in an eligible Qualified Opportunity Zone property through an investment vehicle called a Qualified Opportunity Fund (“QOF”).
Qualified Opportunity Zones:
Qualified Opportunity Zones were identified in all fifty states, the District of Columbia, and five U.S. territories. Opportunity Zones are identified by census tracts, and there are several online map resources available (https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx). Locally, twenty-seven census tracts have been identified as Qualified Opportunity Zones, including, but not limited to, parts of the following communities:
- North Conway
Qualified Opportunity Fund:
Qualified Opportunity Funds are entities taxed as either a partnership or a corporation and are used to invest in Opportunity Zones as well as recognize the previously outlined tax benefits. There are two ways to invest in a Qualified Opportunity Fund:
- Invest in a large managed fund of an ongoing project (similar to a REIT or Mutual Fund)
- Create your own Qualified Opportunity Fund to directly invest in a Qualified Opportunity Zone business or property
Who Should Consider Investing in a Qualified Opportunity Zone?
Long-term investors with sizeable taxable gains could realize significant tax savings by investing in an Opportunity Zone through a Qualified Opportunity Fund. Some things to consider when determining if this tax deferral strategy is right for you:
- Would you be investing regardless of the tax deferral?
- Your assets will be tied up for over ten years in order to maximize tax benefits Can you commit to a long-term investment strategy?
- Will the investment appreciate or depreciate over the next ten years? Maximum tax benefits will be realized by an investment that is worth significantly more in ten years than it is today as under certain conditions; when sold, your basis will be the selling pricing eliminating any tax on the transaction
When Should You Invest?
Taxpayers have 180 days from the date the original gain was recognized to invest in a QOF and be eligible to defer the tax. Special rules govern when the 180 days starts for gains passed through Partnerships and S-Corporations.
In order to realize all tax benefits of investing in Qualified Opportunity Zones, your investment in the Qualified Opportunity Fund must be made by December 31, 2019. Investments and tax deferrals can still be made after that point. However, you will lose out on a 5% step up in basis as it relates to the tax deferral through 2026.
Please reach out to the experts at LMR if you would like help assessing Qualified Opportunity Zones or need help setting up a Qualified Opportunity Fund.