Qualified Opportunity Funds: A property investment opportunity?

The 2018 Tax Cuts and Jobs Act added something new to the tax code called Opportunity Zones. An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury through their authority to the IRS. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.

Opportunity Zones are being used to spur economic development and job creation in distressed communities and in return they are providing tax benefits to investors. A Qualified Opportunity Fund (QOF) is formed and used for investing in eligible property that is located in a Qualified Opportunity Zone. A partnership or corporation can be used as an entity type.

Investors can defer tax on any prior gains invested in a QOF until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. To defer/exclude prior capital gain, within 180 days you have to invest the gain amount in a QOF.

  • If the QOF investment is held for longer than 5 years, 10% of the deferred gain is excluded and goes away forever.
  • If the QOF investment is held for more than 7 years, the 10% becomes 15% and now that 15% deferred gain is excluded and goes away forever.
  • If the QOF investment is held for 10 years, any deferred gain recognized on the sale of your interest in the QOF is excluded forever, as long as the sale takes place before the end of 2047.

A list of Opportunity zones can be found here.
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This article was contributed by Michael J. Reynolds, CPA, CEPA

Photo by Pierrick Barfety on Unsplash