The New Qualified Opportunity Zone (QOZ) 

The New Qualified Opportunity Zone (QOZ) 

By now, you have probably become accustomed to the many changes – for better or for worse – that the tax overhaul bill which was passed in late 2017 brought to us taxpayers.  The Tax Cuts and Jobs Act (TCJA) has been credited with bringing many tax treatment changes to real estate and other asset classes. In particular, the new Qualified Opportunity Zone (QOZ) provisions have been eagerly anticipated for real estate developers and land owners because of some favorable qualities they possess.  

What Are QOZs And Why Were They Created

QOZ came into existence in 2018 and these programs currently exist in 50 states.  They are census tracts and generally composed of economically distressed communities that qualify for the stated program, according to criteria outlined in 2017’s TCJA.  A map of these designated areas can be found at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

Once the target zone is identified, investors then file a Form 8896 to create a Qualified Opportunity Fund (QOF) where they designate either a partnership or corporation for the purpose of investing in the opportunity zone, whether in real estate or directly in businesses through equity. The fund is required to hold at least 90% of its assets in that area.

The QOZ program has proven less restrictive and was created to stimulate private investment in opportunity zone communities in exchange for capital gain tax incentives. Instead of dedicating taxpayer money to developing a multitude of low-income census tracts across the country, this program aims to stimulate the investment of the many trillions of dollars of unrealized private gains held by the nation’s households. In exchange for investing in QOZs, investors can take great advantage of capital gains tax incentives.

The Tax Benefits of QOZs

To sum up briefly, the QOZ incentive regulations allow taxpayers who recognize a capital gain from the sale of an asset (which could include non-real estate, i.e. stocks or securities) to defer the tax on the gain by reinvesting the proceeds from the sale within 180 days into a QOF formed and operated for the purpose of investing in designated QOZs.  Such gains could be deferred until December 31, 2026.  In addition, if the investment in the QOF is held for more than 10 years, then the investor’s basis is treated as being equal to its fair market value on the date the investment is sold, and all of the post-acquisition gain on the investment is effectively exempt from tax.

This positive tax regulation could prove to be a massive tax savings for individuals.  Unlike many other past programs that the U.S. government has put into place in order to stimulate economic growth in depressed areas, QOZs have proved to be more encouraging, and they provide much more benefits.  There are quite a few IRS guidelines that need to be followed to ensure that people follow the parameters of the program. There are potential penalties for companies that attempt to use the program but then do not meet the operating requirements, and it is important to have a plan in place to ensure the provision’s full benefits are obtained.

Our tax attorneys at Dallo Law Group can assist you in uncovering all your tax incentives for QOZs and ensure compliance. We can also you calculate your after-tax potential savings as well as set up your investment planning and timetables, and thoroughly examine the QOZ’s deferral and exclusion aspects so you are clear about the project and the impact.  As always, we offer a free consultation and can be contacted via our website or at 619-795-8000.