RubinBrown Partner Tony Nitti authored an article on the tax ramifications related to opportunity zones. This article appeared in The Tax Adviser.
In summary, the article details that the newly created qualified opportunity zones offer an intriguing tax planning option for investors and a potential boon for distressed communities.
The Tax Adviser article discusses the tax rules regarding investing in qualified opportunity zones through qualified opportunity funds, including:
The Tax Cuts and Jobs Act enacted new Sec. 1400Z-2, which provides a number of benefits designed to encourage investment in areas in low-income communities that are designated as qualified opportunity zones (QOZs).
- Under Sec. 1400Z-2, taxpayers may be able defer realized capital gains by reinvesting them in qualified opportunity funds (QOFs) that conduct or own trades or businesses with property and business activity within the QOZs. These deferred gains may then be partially excluded from gross income if certain holding requirements are met.
Taxpayers eligible to defer gains under Sec. 1400Z-2 include individuals, C corporations, passthrough entities, and trusts and estates. Gain that is eligible to be deferred is gain that is “treated as capital,” would be recognized for federal income tax purposes before 2027, and does not arise from a sale or exchange with a related party.
Generally, within 180 days of a sale or exchange generating eligible gain, an eligible taxpayer may elect to reinvest all or a portion of the gain into a QOF, deferring its recognition until Dec. 31, 2026, or, if earlier, the date the taxpayer sells or exchanges the QOF interest.
Once the taxpayer holds the QOF interest for a five-year period, 10% of the deferred gain is permanently excluded. Once the holding period reaches seven years, an additional 5% of the gain is excluded. If the holding period reaches 10 years, the gain arising after the 2026 recognition date is entirely excluded.
QOFs must hold at least 90% of their assets as QOZ property, which includes QOZ business property (QOZBP), QOZ stock, or QOZ partnership interests.
Even with the release of proposed regulations under 1400Z-2, many practical questions remain for taxpayers who are considering an investment in a QOF.
For more information about the Tax Cuts & Jobs Act, or the related opportunity zones, please contact one of RubinBrown’s Real Estate Services Group professionals.
Readers should not act upon information presented without individual professional consultation.
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