Opportunity Zones – What They Are and What They Mean For Investors.
- Staff - Verum Tax and Accounting, LLP
- Jun 15, 2018
- 2 min read
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The recently enacted Tax Cuts and Jobs Act (TCJA) introduces new extraordinary tax breaks for investors with the following two elections:
• Defer gain from the sale of property that is reinvested in an investment in a Qualified Opportunity (QO) Fund; • Permanently exclude gain from the sale or exchange of the investment held in the QO Fund for ten years. Taxpayers must satisfy a number of detailed and complex rules in order to take advantage of these two elections, but the benefits can be quite substantial.
QO ZONES Under the TCJA, a state’s CEO (e.g. governor) can nominate a limited number of census tracts in low income communities as Qualified Opportunity Zones (QO Zones). IRS has 30 days to certify these nominations and designate the tracts as QO Zones. This entire process must be completed before June 21, 2018. Colorado already has 126 census tracts certified as Opportunity Zones. The map is available for your reference form the Colorado Office of Economic Development and International Trade (https://choosecolorado.com/oz/)
QO FUNDS A QO Fund is an investment vehicle organized for the purpose of investing in a QO Zone. It must be formed as a corporation or a partnership and has to invest at least 90% of its assets in QO Zone property. QO Zone property includes QO Zone stock, partnership interest and any business property.A QO Zone property must meet many requirements, including that substantially all of the entity’s business property is used in a QO Zone.The Treasury has yet to formalize the exact eligibility requirements and rules concerning the formation and operation of QO Funds, but the current consensus is that these will be private sector investment vehicles investing private sector capital in QO Zones in the US.
CAPITAL GAINS INCENTIVES
1. Temporary Gain Deferral Election. A taxpayer can elect to defer the gain from the sale or exchange of property rolled over in a QO Fund within 180 days from the date of the sale/exchange. The gain is deferred until the later of the date of sale/exchange of the investment in the QO Fund or December 31, 2026.
2. Basis in the investment. The amount of Capital Gains tax will be reduced for rolled-over investments held in the QO Fund long-term. A taxpayer’s basis in the investment is initially zero, however it increases 10% for investments held 5 years and additional 5% for holding it for 2 additional years.
3. Permanent Gain Exclusion Election. A taxpayer can elect to exclude any post-acquisition capital gains on an investment in a QO Fund held for a period of 10 years.
Our staff keeps up to date with the developments of this new program in Colorado and nationally. Contact us today to find out how you can take advantage of the investment opportunities and tax incentives introduced with the Opportunity Zone Program.
Disclaimer:
This article does not constitute a tax or legal advice. IRS will be providing further guidance later in 2018 on the changes introduced in The Tax Cuts and Jobs Act.