What are Qualified Opportunity Zones?
The Tax Cuts and Jobs Act’s primary objective is to spur economic growth by creating more jobs, cutting taxes and providing an avenue towards targeted areas ripe for economic development. The Qualified Opportunity Zone (QOZ) is part of the new tax reform legislation which incentivizes investment in a struggling economic area through preferential income tax treatments. Each state’s government can elect to create zones in designated low-income communities. QOZ are designed to not only benefit the investor but also benefit these communities.
Why invest in Qualified Opportunity Zones?
The Opportunity Zones program offers three tax benefits for investing in low-income communities through a Qualified Opportunity Fund:
- A temporary deferral of capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
- A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
- A permanent exclusion of capital gains from the sale of an investment in an Opportunity Fund if held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
How do I invest in a Qualified Opportunity Fund?
To receive these tax benefits you must invest in a Qualified Opportunity Fund (QOF). The QOF must maintain 90% of its assets in a QOZ to qualify as a Qualified Opportunity Fund. A QOF is a self-designated fund by the trade or business operating the fund. These funds must be set up as either partnerships or corporations for the purpose of investing in QOZ property. These assets must be acquired after December 31, 2017, and have originated with the business or be substantially improved from the existing asset base. To be substantially improved, assets purchased must have an equal amount of dollars spent to improve the property. For example, an asset purchased for $100 used, must have an additional $100 spent to improve the asset.
How do I get started?
Now that you are ready to invest in a Qualified Opportunity Fund, help low-income communities and save some money, contact us to talk with one of our many tax planning and investment specialists.
Meet the Author
Senior Tax Manager - Real Estate
Jonathan McGuire, CPA
Aldrich CPAs + Advisors LLP
Jonathan McGuire has over eight years of experience providing strategic tax planning and compliance expertise to private middle-market clients. He has a deep focus as a real estate accountant, working with investors, developers, realtors, property managers, and other professional service providers in real estate. He works with a wide range of property types ranging from…
- Real estate
- Partnership taxation
- Tax planning and compliance
- Certified Public Accountant
- Repair regulations
- Qualified Opportunity Zones
- Qualified Opportunity Funds