Qualified Opportunity Zones

Overview

The Qualified Opportunity Zone (“QOZ”) program was created by the 2017 Tax Cuts and Jobs Act to encourage economic growth in underserved communities through tax incentives for investors who utilize “Opportunity Funds” to invest in the Zones. Along with tax benefits, it presents opportunities for real estate investment and development in those communities. U.S states and territories, including Washington, D.C., nominated areas to be designated as QOZs in 2018, and the IRS and Treasury finalized the designations that year. The U.S. Treasury Department and the Internal Revenue Service are currently conducting notice-and-comment rulemaking to finalize regulations for the program. This is a temporary program, set to fully sunset on December 31, 2047. 

There are multiple tax benefits available to investors who invest in a QOZ, if all the requirements are met. First, capital gains reinvested within 180 days into a QOZ are tax-free for up to nine years, through 2026. If that initial investment is held for five years, the tax ultimately paid on it is reduced by 10%; if held for seven years, it is reduced by 15%. In addition, gains accrued on deferred-gains funds while invested in a QOZ are tax-free if they are held for at least ten years. These investments must be processed through an “Opportunity Fund,” which is a partnership or a corporation organized for the purpose of investing in QOZ property; these funds self-certified, and must hold at least 90% of their assets in QOZ property (which includes stock, partnership interests, and/or tangible property used in a trade or business in a QOZ, such as real estate). 

References

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QOZ

Qualified Opportunity Zones (National Association of REALTORS®) –  General questions, and links to additional resources, including a list of designated QOZs, a map of QOZs, and proposed rules by the Treasury.

Opportunity Zones Frequently Asked Questions (Internal Revenue Service, 2018) — These FAQs (and answers) help to explain opportunity zones and give links to the IRS notices and resources for opportunity zones.

Treasury, IRS Issue Proposed Regulations on New Opportunity Zone Tax Incentive (Internal Revenue Service, 2018) — Includes a list that can be useful for understanding what Opportunity Zones exist in your area.

Recent Developments & Observations: Qualified Opportunity Zones — A Boon With Uncertainty (Journal of Passthrough Entities, 2018) — Looks at the new qualified opportunity fund and how it raises some of the difficult questions that arise under the new law, including the restrictions on opportunity zone business growth, the hazy definition of “substantial improved property” to qualify for tax breaks in an opportunity zone, the amount of unqualified property an investor may hold in opportunity zone assets, and the disparity in the tax basis. E

Worth the Risk? Opportunity Zone Investments Can Come With Their Share of Pitfalls (National Real Estate Investor, 2018) — This article talks about the potential downfalls of investing in opportunity zones. E

Real Estate & Passthrough Corner — (Journal of Passthrough Entities, 2018) — Offers a great flow-chart about how to set up Qualified Opportunity Funds and how those invest in Qualified Opportunity Zones. E

Opportunity Zones: Vital Tool or Tax Windfall for Rich? (Washington Informer, 2018) — This short article talks about African Americans can benefit from the Opportunity Zone program. E

Tax Breaks Open Up Opportunity Zones for Investors (REALTOR® Magazine Daily News, 2018)

Tax Reform Opens New Opportunities for Commercial Real Estate (REALTOR® Magazine, 2018)

Opportunity Zones Proposed Rules Released (NAR Washington Report, 2018) — explains that the Treasury Department released proposed rules for the Qualified Opportunity Zones program.

Trump Administration Unveils New Rules for Opportunity Zones (HousingWire, 2018) — explains the Opportunity Zone tax breaks for investors, but it also links (at the bottom of the article) to the IRS’s guidance for Opportunity Zone Funds.


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