The recently enacted Tax Cuts and Jobs Act (TCJA) introduces two elections: one to defer gain from the sale of property that is reinvested in an investment in a Qualified Opportunity Fund (QOF) and another to permanently exclude gain from the sale or exchange of the investment in the QOF. These elections can provide substantial tax benefits for taxpayers who can satisfy the detailed and quite complex set of rules.
Designation of a Qualified Opportunity Zone (QOZ): Opportunity Zones are tracts created to increase investment by investors in specific low-income communities to boost economic development. As part of this program, investors may defer federal taxes on capital gains until December 31, 2026, reducing the resulting tax by 15%. If the investment in the Opportunity Fund is then held for ten years’ there will be zero taxes paid on the gain when the investment is sold.
Arizona’s Opportunity Zone nominations were submitted on March 21, 2018, and approved by the U.S. Treasury Department on April 9, 2018. This makes Arizona one of the first states nationwide to have officially designated Opportunity Zones.
QOFs: A QOF is an investment vehicle organized as a corporation or a partnership for the purpose of investing in a QOZ. The QOF cannot invest in another QOF and has to hold at least 90% of its assets in QOZ property (i.e., any QOZ stock, any QOZ partnership interest, and any QOZ business property). A QOZ property has to meet many requirements, including that substantially all of the entity’s business property is used in a QOZ. A penalty can apply to the QOF if it fails to meet the 90% requirement.
Temporary gain deferral election: If a taxpayer invests gains from the sale or exchange of property with an unrelated person in a QOF within the 180-day period beginning on the date of the sale or exchange, the taxpayer can elect to defer the gain from the sale or exchange.
Recognition of deferred gain: The taxpayer defers the gain until the earlier of the date on which the investment is sold or exchanged, or Dec. 31, 2026. Taxable gain is reduced by 10% if interest is held for at least five years, and is reduced by 15% if held for at least seven years.
Permanent gain exclusion election: No tax is due on capital gains from the investment after holding interests in QOF for ten years or more.
I hope that you found this brief description of the rules relating to investments interesting. If investing in a QOF sounds like an attractive opportunity, please give us a call at 480-424-7855 and we will be happy to discuss how the Qualified Opportunity Zone rules pertain to your specific set of circumstances and how you may benefit from them.
Morrison, Clark & Company, CPAs