The tax benefits offered by Qualified Opportunity Zone investments are maximized if made by December 31, 2019
Qualified Opportunity Zones (QOZs) provide a unique opportunity for taxpayers to invest in low-income communities while also offering significant tax benefits. QOZs were included in the 2017 Federal Tax Cuts and Jobs Act (TCJA) and are designed to encourage investment and economic growth in designated low-income communities. The Opportunity Zone incentives are an attractive tax benefit available to real estate investors and developers as well as investors and proprietors of operating businesses, and will hopefully serve to transform communities that have been in need for a long time.
Three Main Qualified Opportunity Zone Tax Benefits
There are three main tax benefits associated with Qualified Opportunity Zone Fund (QOF) investments – gain deferral, gain reduction, and gain exclusion. In order to take full advantage of the tax benefits, investors need to be mindful of the timeline for reinvesting these gains. In order to maximize gain reduction, qualifying investments need to be made by December 31, 2019 (seven years prior to the 2026 mandatory gain recognition date). Investors that hold their QOZ fund investment for five years will receive an automatic 10% basis increase. If held for two additional years, they will receive an additional 5% basis increase. The only way an investor can meet the seven year holding period is to invest on or before December 31, 2019. If a QOZ investment is made after December 31, 2019, the investor can only achieve a 5% basis increase.
The QOZ program only applies when investors have capital gain proceeds to reinvest; ordinary gains are not eligible for reinvestment. QOZ funds can also have cash investors who are not deferring gains; but there are no additional tax benefits for cash investors beyond what a typical investment entails. Both investors and fund operators need to be clear on all aspects of the program to ensure compliance throughout the lengthy process.
Given the complexities that accompany these new provisions, there are many aspects that warrant thoughtful consideration. Keiter’s QOZ team is dedicated to assisting businesses and investors successfully navigate the QOZ requirements in order to take full advantage of this unique tax saving opportunity. Contact us. 804.747.0000
Learn more about Qualified Opportunity Zones
- How to Qualify as an Opportunity Zone Business
- Qualified Opportunity Zone Investments
- Clarifying Misperceptions About Opportunity Zone Investments
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.