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Opportunity Zones and Opportunity Funds?
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(i) on the last day of the first six-month period of the taxable year of the fund
(ii) on the last day of the taxable year of the fund
90% of its assets must be QOZ property determined by the average of the percentage of QOZ property held in the fund as measured
Alternatively, QOFs may be established as single-investment vehicles where the QOF finds a property prior to identifying investors
must be “organized” as a corporation or partnership for the purpose of investing in QOZ property
In order to qualify as a QOF, an investment vehicle:
Structure
Z can make an FMV basis election and will not recognize any gain on the sale or exchange
• On or after August 1, 2028
Z will recognize gain upon the sale to the extent it exceeds $500,000
• After December 31, 2026 but prior to August 1, 2028
Z increases his basis by $75,000 (or 15%) and recognizes $425,000
of capital gain upon the sale
* If Z has not sold his interest prior to December 31, 2026, then on December 31, 2026, Z recognizes $425,000 of capital gain
• On or after August 1, 2025 (7 year anniversary of investment)
but before December 31, 2026
Z increases his basis by $50,000 (or 10%) and recognizes $450,000 of
capital gain upon the sale
• On or after August 1, 2023 but before August 1, 2025
The $500,000 of capital gain must be recognized at that time
• Prior to August 1, 2023 (5 year anniversary of investment)
If Z sells his interest in the QOF:
An investor [Z] sells stock, realizing a $500,000 capital gain in July 2018
On August 1, 2018, Z invests $500,000 in a QOF
Z makes an election to apply IRC Sec. 1400Z-2 to the $500,000 gain
No capital gain is recognized on his 2018
tax return filed in 2019
Qualified Opportunity Zone Investment Example
Potential exclusion
from tax on gain generated from the appreciation of investments within
the QOF
Elimination of up to 15% of the tax on the deferred gain
Temporary deferral of tax on gains
Three Tax Benefits for Equity Investing in Opportunity Zones
Let’s take a look at how QOFs provide additional tax benefits for investing, a sample use case,
the criteria for structuring QOFs, and the definition of important terms.
The Opportunity Zone program, a new incentive investment program built into the Tax Cuts and Jobs Act of 2017, provides significant tax and economic benefits for investors, real estate developers and fund sponsors through “qualified opportunity funds” (QOFs) in targeted communities. Investing through Opportunity Funds provides developers and investors with tax advantaged investment opportunities designed to spur local economic development.
Tax Credit Incentives
for Investors
Qualified
Opportunity
Zones:
QOZ stock
What Qualifies as a QOZ Business?
Both the QOZ stock and QOZ partnership interest require that the acquired or newly created entity be a QOZ business –
a trade or business in which:
Substantially all of the tangible property owned or leased by the taxpayer is QOZ business property
At least 50% of the gross income is derived from the active conduct of the trade or business
A substantial portion of any intangible property is used in the active conduct of the trade or business
Less than 5% of the
average of the aggregate unadjusted bases of the property is attributable to “nonqualified financial property"
The trade or business is not a specifically excluded business
Zone Maps
QOZ Property - Defined
QOZ Property
QOZ partnership interest
QOZ business property