HOW QUALIFIED OPPORTUNITY ZONE FUNDS OFFER UNIQUE TAX ADVANTAGES
BY WALTER DASZKOWSKI
The Tax Cuts and Jobs Act of 2017 introduced a new tax incentive intended to encourage economic growth and investment in distressed communities classified as “opportunity zones.” The U.S. Treasury has certified over 8,700 such communities, spanning all fifty states.
The legislation provides powerful tax incentives to encourage investment in what is termed an opportunity zone fund (“OZ Fund”) an investment vehicle organized as a corporation or a partnership for the purpose of investing 90% of its assets in qualified business property located in such a opportunity zone. Alternatively, an OZ Fund can invest in an OZ business by acquiring equity interests in a qualified opportunity zone corporation or partnership that owns and operates the opportunity zone business.
TAX BENEFITS AVAILABLE FOR QUALIFIED OPPORTUNITY ZONE INVESTMENTS
Deferral of capital gains invested in OZ Funds until 2026 and potential exclusion of up to 15% of such gain. A taxpayer who recognizes capital gains from the sale of investments can elect to defer recognizing the gain by investing the amount of the realized gain into an OZ Fund within 180 days of the sale. The recognition of the gain realized on the sale of the appreciated asset is deferred until the earlier of (1), the date that the taxpayer disposes of the OZ Fund and (2), December 31, 2026.
The amount of the deferred capital gain that will ultimately be subject to tax is reduced by 10 percent for a taxpayer who holds its OZ Fund interest for at least five years, and by an additional 5 percent for a taxpayer who holds its OZ Fund interest for at least seven years.
Exclusion from gross income of all appreciation on qualifying investments in OZ Funds held for at least ten years. A taxpayer who has made an election to defer capital gains by investing in an OZ Fund can also permanently exclude the potential capital gains from the sale or exchange of the investment if the OZ Fund is held for more than 10 years.
OPPORTUNITY ZONES: A WIN-WIN-WIN
This legislation has the potential to be a powerful driver of investment activity, a boost to economically challenged areas, and a boon for taxpayers looking to minimize taxes on capital gains. That said, details of structuring and operating an OZ Fund are complicated by the many technical provisions of the law, and therefore taxpayers should be thoroughly familiar with it and/or consult with tax advisors to ensure compliance.
