Opportunity Zones, created by The Tax Cuts and Jobs Act of 2017, were designed to encourage investment in distressed communities. Treasury Secretary Steven Mnuchin estimates that these tax benefits can generate up to $100 billion of invested capital. While the proposed regulations pertaining to Opportunity Zones have yet to be finalized, there is enough guidance for a strong preliminary understanding of how these tax incentives will work.
Structured as Qualified Opportunity Funds (QOF), these investments have two distinct capital gains tax benefits. First, federal taxes on any prior capital gains incurred after 12/22/2017 can be deferred until 12/31/2026 if invested in a QOF and reduced by 10 or 15% depending on how long the QOF is held and if certain deadlines are met. Second, if the QOF is held for 10 years, there will be no federal capital gains tax on the QOF itself.
To qualify for these tax benefits:
- The investment vehicle (a domestic corporation or partnership) must self-certify with the IRS as a Qualified Opportunity Fund (QOF) and comply with annual reporting requirements.
- The QOF must hold 90% of its assets within a qualified Opportunity Zone.
- Investments will be limited to new developments or capital-intensive projects (substantial improvements to the property within 30 months of acquisition).
- QOFs will need to adhere to various deadlines and time-frames.
Expectations are that areas adjacent to Opportunity Zones can benefit from investments and that these surrounding areas could also see an improvement in real estate fundamentals. Census tracts to be included within the Qualified Opportunity Zones were nominated by each respective state, finalized in June of this year and will retain this designation for 10 years.
Capital gains invested in a QOF do NOT need to be “like kind,” they can be capital gains incurred on other investments like securities. QOFs are not limited to real property. Similar incentives are available for business investments within qualified Opportunity Zones. Total tax benefits from QOF investments will vary based on each state’s treatment of Opportunity Zones. This article is not meant to take the place of sound tax advice. Please discuss and confirm tax benefits with your tax professional before making any investments.
For a map of all designated qualified Opportunity Zones, go to:
https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml and click on the Layers tab on the right side of the screen. Select Opportunity Zone Tract and deselect 2011-2015 LIC Census Tract. Zones appear in blue. Zoom in for a closer look.