Qualified Opportunity Zones: A Gift that Keeps on Giving

What is a Qualified Opportunity Zone?

2017 Tax Cuts and Jobs Act created Qualified Opportunity Zones (QOZ) to provide tax benefits to investors who invest eligible capital gains into designated economical distressed communities. To date, over 8,700 low-income communities have been designated as QOZs. A list can be found at https://www.cdfifund.gov/pages/opportunity-zones.aspx. The concept of the program is to award favorable tax treatments to taxpayers who invest capital gains from investments into a designated Qualified Opportunity Fund (QOF).

What is a Qualified Opportunity Fund (QOF)?

QOF is an investment vehicle, which is organized as a corporation or a partnership, designed to invest and hold at least 90 percent of its assets in qualified opportunity zone property, determined by the average of the percentage of qualified opportunity zone property held in the fund as a measure (i) on the last day of the first 6-month period of the taxable year of the fund, and (ii) on the last day of the taxable year of the fund.

What are the tax benefits of Qualified Opportunity Zones?

There are three possible tax benefits of investing into Qualified Opportunity Zones.

• A taxpayer may defer a realized gain on appreciated investment by investing the deferred gain in a QOF within 180 days of the investment’s date of sale. The gain is deferred until the earlier of
  • The date investor sells the QOF investment
  • 12/31/2026
• A taxpayer who defers again through QOF investment receives a 10% step-up in basis after five years, and 15% step-up basis after seven years. Given the 12/31/2026 trigger date, taxpayers would need to make a QOF investment by 12/31/2019 to receive the special 15% step-up treatment, or by 12/31/2021 to receive the special 10% step-up treatment.
• A taxpayer who leaves the investment in the QOF for at least ten years will receive tax-free treatment on the appreciation. (The cost basis of the investment will equal the fair market value on the date of sale/exchange)

How do I elect to defer my gain on the sale of stock if I invest in QOF?

You may elect to make the election on the tax return on which the tax on the gain would be due if you do not defer it. For example, if you sold stocks on December 1, 2019, and invested into a QOF on March 15, 2020, the election would be on the 2019 tax return. If you accidentally filed your tax return without deferring the tax, don’t worry because you can still defer the gain by filing an amended tax return using 1040-X.

Can I invest in businesses in QOZ and reap the same benefits?

Absolutely, but the requirements for a Qualified Opportunity Zone Businesses are different. The businesses must meet one of the three “50 percent of gross income tests” which are

• Total hours worked by employees and independent contractors within a QOZ must be at least 50%
• Total dollars paid to employees and independent contractors for services performed within a QOZ must be at least 50% of the company’s total dollars paid for services performed
• At least 50% of gross income must be generated from property and management functions within QOZ

How does a corporation or partnership become a QOF?

An eligible corporation or partnership needs to file form 8996, Qualified Opportunity Fund, with its federal income tax return.