In 2017, the Tax Cuts and Jobs Act established a Qualified Opportunity Zone program that provides tax incentive for investing your money in an “economically stressed community.” All 50 states have certified zones and investing in these areas provide the opportunity to defer and potentially reduce the taxes you pay on recognized capital gains. This is done through Qualified Opportunity Zone Funds (“QOF”) which allow the investor to roll profits from their current holdings into QOFs to achieve significant tax benefits. This is not limited to the capital gains from your personal income either, as K-1 or 1099 gains from partnerships, LLCs, and C & S Corporations can be used as well.
The Qualified Opportunity Zone Fund is set up as an investment vehicle, organized as either a corporation or a partnership, for the specific purpose of investing in one of the designated qualified opportunity zones. The investment vehicle must hold at least 90 percent of its assets in that zone to qualify for tax benefits, and a full list of zones can be found at https://www.cdfifund.gov/pages/opportunity-zones.aspx. To defer a gain, you have 180 days from the date of the sale or exchange of appreciated property to invest that gain into your Qualified Opportunity Zone Fund. The Fund then invests in a Qualified Opportunity Zone Property. Any property (stock, partnership interest, or business property) that is acquired after December 31, 2017 and used in trade or business conducted in a designated zone will qualify. There must, however, be a substantial improvement on the property equal to or greater than the Opportunity Zone Fund’s initial investment in the property over a 30-month period.
Turning to the tax benefits that you may receive, a taxpayer can elect to defer the tax on some or all of a capital gain if, during the 180-day period following the sale or exchange of property, an investment in a Qualified Opportunity Zone Fund is made. That gain will not be recognized until December 31, 2026 or until the interest in the fund is sold or exchanged, whichever occurs first. Additionally, any taxpayer that defers the gain in this manner will receive a 10% step-up in tax basis after 5 years and an additional 5% step up after seven years. To learn more about this investment opportunity and to learn if it could be a smart decision for you, contact the attorneys at Rock, Fusco & Connelly, LLC