Created as part of the Tax Cuts and Jobs Act of 2017, the Qualified Opportunity Zone program created tax incentives for certain investments in lower income areas. Opportunity Zones offer tax benefits to business or individual investors who can elect to temporarily defer tax on capital gains if they timely invest those gain amounts in a Qualified Opportunity Fund (QOF). To obtain the maximum benefit still available from the program, taxpayers need to make qualified investments before December 31, 2021.
The primary benefits of the program are:
- Deferral of your gain until December 31, 2026. If you sell the investment before then the tax is due in the year of the sale;
- For gains invested prior to December 31, 2021 you get a 10% exclusion on the original deferred gain if held for 5 years; and
- For investments held more than 10 years, the appreciation on the original gain is tax free. Depreciation recapture is also excluded after the 10 year holding period.
Here is an example of how a taxpayer can benefit: Assume you have a $100,000 gain, invest it in a QOF, and 10 years after your investment receive $300,000 on a subsequent sale. You’ll pay tax on $90,000 of gain on your 2026 tax return and nothing more.
Individuals, C-corps, RICs, REITs, partnerships, S-corps, trusts and estates are all eligible to participate in the program. A QOF is a corporation or partnership that has elected to be treated as such. It must be organized for the purpose of making investments in Qualified Opportunity Zone Business Property (QOZBP), must have at least 90% of its assets be QOZBP, be the original owner of the QOZBP or make significant improvements to the acquired property, and meet a myriad of other rules and reporting requirements to ensure its investors get the full benefits of the program.
For more information about this program, contact us. We are here to help.