Qualified opportunity zones (QOZ) are quite possibly the largest tax savings tool out of the tax reform passed in December of 2017. In a previous article, we outlined some of the basics of what an opportunity zone is and why you should invest in them, but a recent update provides clarity on how to invest in a qualified opportunity fund (QOF).

The initial tax law on this program contained a number of grey areas that required further interpretation from the Treasury Department. In October 2018, the IRS issued proposed regulations and other guidance on how to qualify and utilize the tax benefits of the opportunity zones.

Here are the answers to some of the most relevant and important questions about how to invest in a qualified opportunity fund.

In other guidance, the IRS ruled that land does not need to be substantially improved, which is a very pro-taxpayer determination. The question that was raised was that land is inherently permanent and the original use requirement thereby impossible to meet. Land would otherwise need to be substantially improved to qualify. The IRS has specifically exempted land from the substantial improvement rules, including land improvements, so that only structures need to be improved.

For example, assume a QOF purchases land and building inside an opportunity zone for $500,000. Assume the fair market value of the land is $200,000 and the building value is $300,000. To substantially improve property, only $300,000 of building improvements must be completed within 30 months from the date of purchase.

If you would like to pursue an investment in a qualified opportunity zone and setup a qualified opportunity fund, please contact one of our tax professionals at Aldrich. Our industry experts will be able to help you create the fund and ensure you are in compliance with this new and exciting opportunity.