Opportunity Zones

Qualified Opportunity Zones were created by the 2017 Tax Cuts and Jobs Act. These zones are designed to spur economic development and job creation in distressed communities throughout all 50 States, the District of Columbia, and the five U.S. territories by providing tax benefits to investors who invest eligible capital into these communities.

An Opportunity Zone is generally an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualified as Opportunity Zones if they were nominated for that designation by the State or Territory and that nomination was certified by the U.S. Secretary of the Treasury via his delegation of that authority to the Internal Revenue Service. There are 8,764 Opportunity Zones in the United States, many of which have experienced a lack of investment for decades.

Investment Timeline + Benefits

Fewer than 5 years - Deferred tax payment on original capital gains until December 31, 2026 or the date that the QOF investment is sold or exchanged (whichever date is earlier)

5-7 years​ - ​Deferred tax payment on original capital gains until December 31, 2026 or the date that the QOF investment is sold or exchanged (whichever date is earlier) AND 10% reduction in the amount of the original capital gains when the deferral ends and they are subject to tax

7-10 years​ - ​Deferred tax payment on original capital gains until December 31, 2026 or the date that the QOF investment is sold or exchanged (whichever date is earlier); AND an additional 5% reduction (total of 15%) in the amount of the original capital gains when the deferral ends and they are subject to tax

Greater than 10 years​ - ​Permanent tax exclusion of the appreciation in the QOF investment (the initial value of which was the amount of the original capital gains, which were deferred)​ ​

Establishing a Fund

Taxpayers may defer and reduce tax liability on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund (QOF) and meeting other requirements.

Under the proposed regulations, to qualify for deferral:

• Capital gains (short-term or long-term) must be invested in a QOF within 180 days.

• Taxpayer elects deferral on Form 8949 and files with its tax return.

• Investment in the QOF must be an equity interest, not a debt interest.

If a taxpayer holds its QOF investment for at least five years (prior to December 31, 2026), the taxpayer may exclude 10 percent of the original deferred gain from being taxed. If a taxpayer holds its QOF investment for at least seven years (prior to December 31, 2026), the taxpayer may exclude an additional five percent of the original deferred gain (for a total exclusion of 15 percent of the original deferred gain) from being taxed. The original deferred gain – less the amount excluded due to the five- and seven-year holding periods – is recognized on the earlier of sale or exchange of the investment, or December 31, 2026. If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer may elect to increase its basis of the QOF investment to be equal to its fair market value on the date that the QOF investment is sold or exchanged. This may eliminate tax on appreciation on the QOF investment

Investors

In June 2019, an individual investor in the highest tax bracket sells 1,000 shares of XYZ stock that the individual purchased in 2013 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead of paying the $238,000 in Federal income tax on this sale, the individual invests $1 million into a QOF within 180 days. The investment in the QOF must be an equity investment. The QOF invests the capital in newly issued preferred stock shares of various operating businesses located in Opportunity Zones. The individual plans to sell the QOF in 2030. The value of this investment in 2030 is $2.5 million. The benefits received by this investor include:

• Investing $1 million instead of paying $238,000 in Federal income tax.

• Paying taxes on $850,000 of gains in 2026 instead of paying $238,000 on $1 million in gains in 2019.

• Owing no additional tax on the $1.5 million in gains on the QOF investment realized in 2030.

To qualify for the investor benefits described above, a QOF must:

• Be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone property, and file IRS Form 8996 with its tax return.

• Hold at least 90% of its assets in Qualified Opportunity Zone property. (Qualified Opportunity Zone property includes newly issued stock, partnership interests, or business property in a Qualified Opportunity Zone business).

There are additional requirements for Qualified Opportunity Zone Businesses and qualifications for Qualified Opportunity Zone Business Property that must be met under the statute and regulations.