The Opportunity Zone Program, established by the 2017 tax reform legislation—commonly referred to as the Tax Cuts and Jobs Act (Pub. Law 115-97)—seeks to encourage long-term investment in low-income communities.
If applied correctly, the Opportunity Zone Program may provide ways for property owners to reduce their overall tax burden. However, there are still several questions about the funds, how to determine if you qualify, and how to effectively invest.
New Internal Revenue Code Sections 1400Z-1 and 1400Z-2 allow taxpayers to defer and reduce capital gains from the sale or exchange of property by investing the gain into a Qualified Opportunity Fund (QO Fund) within 180 days of the exchange. These funds must be invested, directly or indirectly, into property located in designated Qualified Opportunity Zones (QOZ).
If you already have material gains from the sale or exchange of property in 2018, or anticipate material gains in the future, investing in QO Funds may be a strategic tool to lower your overall tax burden. However, the IRS hasn’t yet released regulations, so some specific details of the program aren’t yet available.
Here are the most common questions related to QOZs.
A QOZ is a designated area that’s been nominated by the state and approved by the IRS. The CEO or governor of each state and US territory nominated up to 25% of its low-income community census tracts as QOZs. The Department of Treasury then designated nominated tracts as QOZs. From that information, the IRS issued Notice 2018-48, listing all designated QOZs in all states.
A map and list of designated funds can be found here.
The program provides the following three incentives for taxpayers who invest gain from a sale or exchange of property into a QO Fund.
As an example of these three benefits, suppose a taxpayer sells property on October 1, 2018, realizes a capital gain of $100,000, and invests that $100,000 into a QO Fund on January 1, 2019. The investment is later sold for $125,000. The following facts apply based on the dates that it’s sold:
A QO Fund is a corporation or a partnership organized for the purpose of investing in QOZ property. The corporation or partnership must hold at least 90% of its assets in QOZ property, determined by the average of the percentage of QOZ property held by the entity as measured:
The IRS is expected to issue forms in summer of 2018 that allow eligible taxpayers to self-certify as QO Funds.
QOZ property includes any of the following types of property:
It’s worth noting that for QOZ stock and QOZ partnership interests, at least 50% of the business’s total gross income must come from the active conduct of the business. A large portion the business’s intangible property use must also take place in the active conduct of such business, and less than 5% of the average of the aggregate unadjusted bases of the business’s property must be attributable to nonqualified financial property.
Generally, QOZ property is either QOZ business property or stock or interest in an entity that holds QOZ business property. QOZ business property is generally tangible property used in a trade or business that meets the following criteria:
We’ll provide updates on this topic as the IRS releases further guidance. In the meantime, if you’d like to learn more about how you or your business can best benefit from the Opportunity Zone Program, please contact your Moss Adams professional or email statetax@mossadams.com.