Tax Benefits of Opportunity Zone Investments


Are you planning to, or did you recently sell, an asset or investment for a significant gain? Would you be willing to invest in a low-income community in order to receive a tax benefit? The Tax Cuts and Jobs Act of 2017 (TCJA) has created an Opportunity Zones program that provides an option for taxpayers to invest in economically disadvantaged areas and use such an investment as a tax deferral vehicle.

The Opportunity Zones program is governed under Internal Revenue Code Section 1400Z-1 and 1400Z-2. The tax incentives provide investors with an opportunity to defer recognition of gains from sales of assets, permanently reduce a portion of the deferred gain to be recognized and permanently exempt any future gain with respect to reinvested proceeds. This is accomplished by reinvesting the gain in a Qualified Opportunity Fund (“QOF”), an investment vehicle specifically focused on making investments in a Qualified Opportunity Zone (“QOZ”).

What is considered as QOF?

Taxpayers can form a QOF (corporation or partnership) to hold a real property or own a business in the QOZ. QOZs are low-income census tracts (or census tracts contiguous thereto) that are nominated by the governor of each state and each U.S. possession and are approved by the U.S. Treasury. Designation of a QOZ will remain in effect for 10 calendar years. Designated QOZs can be found at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

Tax Incentives

  • Temporary deferral for recognition of realized gain until as late as December 31, 2026.
    • To the extent the gain portion of the proceeds is reinvested in a QOF within 180 days of the sale or exchange of any asset, the gain is not required to be recognized in the year of sale. Gain deferred is recognized upon the earlier of the date the investment in the QOF is sold, or December 31, 2026.
  • Permanent reduction of deferred gain depends on how long the investment in the QOF is held:
    • 10% of original deferred gain if the QOF is held at least five (5) years before gain is recognized.
    • Additional 5% of original deferred gain if the QOF is held at least seven (7) years before gain is recognized.
  • Exemption from realized gain on the QOF investment if held at least 10 years. Gain on subsequent appreciation is eligible for permanent exclusion if the QOF investment is held at least 10 years.

Penalty if the 90% investment requirement in QOZs is not met

If a QOF fails to invest at least 90% of its capital in the Opp ortunity Zone, there will be a penalty each month equal to the required amount of QOZ ass ets over the actual amount of QOZ assets multiplied by the underpayment rate for that specific month. The underpayment rate will be the federal short-term rate (as determined by the Secretary of the Treasury), plus 3%.

If you have questions or would like more information, please contact Bella Wang at bwang@windes.com or 844.4WINDES.

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