Opportunities Expiring for Opportunity Zones
In 2017, the Tax Cuts and Job Act (TCJA) created Qualified Opportunity Zones to stimulate economies in low-income communities through tax benefits to investors who invest eligible capital into these communities.
Taxpayers can benefit from the Opportunity Zones through the investment vehicle known as Qualified Opportunity Funds (QOF). The QOFs must be a partnership, corporation, or a limited liability company, while any entity (individuals, partnerships, etc.) can be an investor. Investing in QOFs can present the following three tax incentives to investors:
- Deferral of Capital Gain
- Potential reduction in the amount of gain realized
- Potential permanent exclusion of gain (QOF)
- No cap on the amount of investment for QOF
Under Code Section 1400Z, to receive favorable tax treatment, investors who gain from selling or exchanging a capital asset to an unrelated party have 180 days, from the date of disposition, to reinvest that gain with a cash investment into a QOF. The QOF must hold at least 90% of its assets in “Qualified Opportunity Zone Property,” which can include stock, partnership, or real property. Investors that hold the interest in the fund receive the following benefits:
- If held for five years, basis increase of 10% of gain invested
- If held for seven years, basis increase of 15% of gain invested
- If held for ten years, basis increase to equal FMV
For investors to receive a 5 percent increase in basis, investors have until the end of 2019 to invest in a fund. Additionally, for investors to receive a 10 percent increase in basis, they must be invested by 2021.
See below for an example of how the investment would be completed:
- The stock sold for a $100,000 gain
- $100,000 (the gain) invested in QOF
- Fund held for five years and is now valued at $300,000
- The fund is sold for $300,000
- Original gain is reduced by 10%
- The total taxable gain is $290,000
- If QOF held for seven years, 15% or $15,000 of gain is not taxed
- If QOF held for ten years, the gain on the QOF is not taxed
The end of 2019 is fast approaching, and anyone can benefit from QOFs. To read more about Opportunity Zones, click here.