Qualified Opportunity Zones can produce tax free gains for investors with capital gains. This new vehicle was added added to the December 2017 Tax Cut and Jobs Act.
Jonathan McGuire takes us through the Qualified Opportunity Zones and how they can benefit investors.
Government sponsored investment incentives are nothing new. Tax credits or special treatment for a desired behavior are a tool used to stimulate growth and encourage investors to deploy needed capital. The vehicle identifies the area of need and rewards investors for taking a risk through tax abatement. The most recent example on the Federal level is found in the Qualified Opportunity Zones.
What is a Qualified Opportunity Zone
The 2017 Tax Law provided the opportunity for each state to nominate distressed areas in need of investment to the US Treasury. If certified by the Treasury, the area is recognized as a qualified opportunity zone. Investors can find a current list for each state Qualified Opportunity Zones to find local opportunities near them.
The opportunity for investors is pretty broad. Projects must abide by local zoning rules and be new investment into a project. There are certain types of investments which are prohibited including: investment must be new money into a business or property. Real estate can be new construction or a rehab project. If the property is in the zone, it must follow local use guidelines. Sin type businesses are not eligible, bars, country clubs, liquor stores, casinos, etc.
Benefits of investing in a Qualified Opportunity Zone
There are multiple tax benefits available to qualified investors.
- Deferred payment of capital gains.
- Stepped up basis for investments held for:
- 5 years earns a 10% step up in basis
- 7 years earns a 15% step up in basis
- Tax free gain on the appreciation of your investment if held for more than 10 years!
Who can invest in a Qualified Opportunity Zone
The investor must have a recognized capital gain within the last 180 days, which must be deposited in the Qualified Opportunity Fund. At this time, there is no recognized requirement to use a qualified intermediary, similar to a 1031 exchange.
The capital gains can come from any investment, sale of a business, property, stock, etc.
How to invest in a Qualified Opportunity Zone
In order to invest in a property located in a Qualified Opportunity Zone, you must use a Qualified Opportunity Fund. A fund is an investment vehicle set up as a separate corporation or partnership, designated to invest in a qualified opportunity zone. The initial investment must include capital gains.
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