Recap of Opportunity Zone Requirements and Benefits

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Our last Tax Alert discussed regulations the IRS issued last month with guidelines for the new Opportunity Zones, enacted in the Tax Cuts and Jobs Act last December. The following recap of Opportunity Zone requirements and benefits is excerpted, with permission, from a recent article by Tony Nitti in Forbes Tax Geek Tuesday. It provides an excellent summary of the high points. The full article may be found here.

 

Requirements

  1. To defer/exclude capital gain, within 180 days you have to invest your gain amount in a Qualified Opportunity Fund (QOF).
  2. That fund has to conduct a Qualified Opportunity Zone business, either directly -- in which case more than 90% of the assets of the QOF must be Qualified Opportunity Zone business property -- or indirectly, in which case more than 90% of the assets of the QOF must be stock in a corporation or an interest in a partnership that, in turn, conducts a Qualified Opportunity Zone business.
  3. When the QOF conducts a qualified opportunity zone business through a corporate or partnership subsidiary, more than 70% of the assets of the corporation or partnership must be Qualified Opportunity Zone Property. Thus, in total, more than 63% of the assets of the QOF must be Qualified Opportunity Zone property (90% * 70%).
  4. Qualified Opportunity Zone business property is property that was acquired after 2017, that has never before been used in a Qualified Opportunity Zone, or that has been used in a Qualified Opportunity Zone but that will be substantially improved within 30 months.
  5. Qualified Opportunity Zone is a specially designated low-income area.

 

Benefits

  1. You don't have to recognize your original capital gain immediately.
  2. Instead, you will recognize the deferred gain on the earlier of 1) the date you sell your interest in the QOF (unless you reinvest in another QOF within 180 days), or 2) December 31, 2026.
  3. However, if you hold the interest in the QOF for five years before one of those two events occur, 10% of the deferred gain goes away forever.
  4. If you hold the interest in the QOF for seven years before one of those two events occur, another 5%, or 15% total, of the deferred gain goes away forever.
  5. And if you hold the interest in the QOF for TEN years, any gain recognized on the sale of your interest in the QOF is excluded forever, as long as the sale takes place before the end of 2047.

 

LM Cohen will keep you updated as we receive further clarification from the IRS. Meanwhile, please contact us if you have any questions about this tax topic or other aspects of the tax law. All our prior Tax Cuts and Jobs Act Alerts are available on the Updates page of our website.

 

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