Included in the recent Tax Cuts and Jobs Act was the creation of IRC 1400Z – Opportunity Zones (OZ), which are economically distressed communities identified in all 50 states, plus D.C., and five of the U.S. possessions. Investing in these communities can provide for major tax savings. New regulations, which were issued October 19, are located here.
This new provision provides for the deferral of tax on reinvesting capital gain income into a Qualified Opportunity Fund (QOF) within 180 days of the capital gain event. This benefit is not limited to individuals only. Entities can also take advantage of QOF investing.
The proposed regulations specify that only “capital gain” is eligible for deferral. Thus, any transaction that results in the gain being treated as a capital gain for federal tax purposes would be eligible for rollover. Both long- and short-term capital gains should qualify, since no distinction in the Code was made. The capital gain could be from anything – sale of real estate, stocks, bonds, collectables, etc. However, one key open point is the treatment of 1231 gains from the sale of property. Additional guidance from the IRS will be needed to clarify this point.
Investing in an OZ requires the investment to be made through a QOF. At least 90% of this type of fund’s assets consists of OZ property.
A QOF can be either a partnership, LLC, or a corporation; no formal certification is needed, but rather, the entity self-certifies by submitting a form with its tax return. It is important to note that this form has not yet been released by the IRS.
The QOF uses the deferred gain to invest in real estate located in an OZ and can also take equity positions in operating businesses located in an OZ.
The benefits of investing in a QOF are divided into two parts and based on holding period. The first part is what happens to the original capital gain rolled into the QOF, and the second part is what happens to the capital gain generated by the QOF itself.
|Holding Period||Tax Benefit for Original Capital Gain*||Tax Benefit for QOF Capital Gain|
|Less than 5 years||Subject to tax in the year the QOF is sold||Subject to tax in year of sale|
|5 to 7 years||90% of capital gain subject to tax in the year the QOF is sold||Subject to tax in year of sale|
|7 to 10 years||85% capital gain subject to tax in the year the QOF is sold||Subject to tax in year of sale|
|More than 10 years||85% capital gain subject to tax in the year the QOF is sold||No tax|
* The holding period is measured from the date of the QOF investment to the disposition of that investment, or December 31, 2026, whichever is earlier.
For questions about this new tax savings opportunity or other tax matters, please contact Laurence C. Rubin, CPA at 301.222.8212.