A Qualified Opportunity Zone is an economically distressed community within the United States. The US Census defines potential qualified opportunity zones, and then a state governor nominates them: the Secretary of the Treasury certifies them.
The 2017 Tax Cuts and Jobs Act created the Qualified Opportunity Zone Program. The goal of the program is to get persons with capital to invest in the Qualified Opportunity Zones. A major benefit for investors is that this is a way to reduce tax on capital gains. However, there are certain rules you must follow as an investor to reap the benefits of the program.
How The Program Works
If you wish to defer your capital gains, you have 180 days from the sale of an asset to invest the capital gain dollars into a Qualified Opportunity Fund. This Fund acts as the vehicle for investing in Qualified Opportunity Zone properties.
It is possible to use a variety of assets to invest in the Qualified Opportunity Zone Program. You can reinvest any appreciated asset you sell into a Qualified Opportunity Fund. It is not necessary to invest a certain kind of property to defer gains.
Keep in mind that it may take time before you realize gains on a Qualified Opportunity Fund. The purpose of this program is to stimulate areas in need of economic revitalization; thus, the government expects a Fund to continually invest into the target property. For instance, it is unlikely you will see cash flow from a revitalized storefront until a construction company completes renovations and a third party either leases or purchases the property.
The program offers three main income tax incentives to the investor: deferral, discount and exemption. In terms of deferral, If you invest in a Qualified Opportunity Fund using capital gains within the aforementioned allotted 180 days, it is possible to defer government recognition of said gains until either you sell the investment or December 31, 2026. You may invest a higher amount in a Qualified Opportunity Fund than whatever the amount of capital gains you hold is, but only the capital gains will get the tax benefits.
Regarding discount, the longer that the gains remain in the Qualified Opportunity Fund, the more likely the investor is to have the taxation on the capital gains discounted. Depending on how long the gains are in the Fund, the government may exempt up to 10% of rolled gain from taxation.
It is also possible for an investor to exclude any appreciation on the opportunity zone investment gains permanently, so long as the gains remain in the Fund for at least 10 years.
Should I Invest in a Qualified Opportunity Fund?
Much depends on your individual situation. Investing in Qualified Opportunity Funds does involve a level of risk, including liquidity risk and market loss. They are inherently speculative investments, and there is the possibility of the Fund declining in value, which can erode the tax benefits associated with this investment.
It is important to consult with a professional prior to deciding if investing in Qualified Opportunity Zones is right for you. You will also need to keep in mind that your capital will need to stay in the Fund for a number of years: usually between 5 to 7, but longer is better.
Contact us at Reef Point to learn more about Qualified Opportunity Funds and other investment opportunities.