Maximizing Opportunity Zone Benefits

• 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.

Recognizing a capital gain is the first step. The source of the gain (within your business, on a brokerage statement or somewhere else) will determine when your 180-day clock starts to reinvest the gain in a Qualified Opportunity Zone Fund (QOF). There are also elective start dates for the 180-day window when the gain is reported to you. The gain must have otherwise been subject to U.S. taxation as well. Partnerships with foreign and tax-exempt investors should use caution when making a gain deferral election.

Who can invest in a QOF?

Eligible taxpayers are individuals, C-corps, RICs, REITs, partnerships, S-corps, trusts and estates. The investment must be made with cash to qualify. Non-gain dollars can be invested, but they won’t qualify for all the benefits of the program. You can also make an investment that is a mix of gain and non-gain dollars.

If I want to sponsor a QOF, will my carried interest qualify for the tax benefits?

No.

If I have property in an opportunity zone that I want to develop, can I sell it to a QOF that I’m a partner in?

Yes, but if you own more than 20% of the QOF it’s going to cause issues for the Fund.

Can I take out debt on my assets and distribute the proceeds?

Yes, but close attention needs to be paid to shareholder basis and timing of the debt financed distribution to prevent it from being a taxable inclusion event. Inclusion events accelerate the recognition of the previously deferred gain and there are several transactions listed in the Regulations that are defined inclusion events.

Can QOF’s invest in businesses as well?

Yes, a Fund can invest in a Qualified Opportunity Zone Business. These entities have three additional benefits:

• Only 70% of a QOZB’s tangible property needs to be QOZBP. QOZB has a 31-month grace period to deploy its working capital for purposes of meeting the asset tests and can utilize an additional 31 month period for a second injection of working capital. There is no annual reporting to the IRS.

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