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BY ShuffieldLowman|April 8, 2019

Get to Know the Income Tax Benefits of NEW Qualified Opportunity Zones

In December of 2017, the U.S. Congress established the Qualified Opportunity Zone (“QOZ”) program, designed to help economically-distressed communities where new investments, under certain conditions, may be eligible to generate preferential tax treatment for investors.  Investments made in these designated QOZs through a qualified legal entity referred to as Qualified Opportunity Fund (“QOF”) are intended to provide much-needed new investment and capital into economically depressed communities throughout the United States and Puerto Rico.  In short, the QOZ program is an economic development tool designed to spur economic development, revitalize communities in need, and create jobs in distressed communities by attracting new investments in exchange for select income tax benefits.

In general, here is how the QOZ program operates.  If an investor disposes of assets (e.g., stocks, real estate, an operating business), on or after Dec. 22, 2017, which triggers taxation of capital gains to the investor, then such investor may seek to utilize the QOZ program.  The investor can either create or locate a QOF to invest a portion of its transaction proceeds (e.g., cash) within 180 days of the divestment (sale) transaction date.  Once capitalized, the QOF must, in turn, invest a certain minimum amount of its assets (directly or indirectly) into an operational business or real property located in a QOZ.  The QOF oversees and manages the investment in the QOZ until the QOF decides to divest from the QOZ investment at a future date.  In exchange for this QOZ investment, the QOF receives certain income tax benefits that it passes along and up-the-chain to its owners and investors.

As you can imagine, the rules and regulations governing QOZs and QOFs are complicated and require detailed analysis; the previous paragraph is a rather simple summary of a QOZ transaction.  Below is a list of some very important highlights to keep in mind when considering an investment using the QOZ program.

  1. The investors can defer income taxation on prior capital gains that are invested in a QOF until the earlier of December 31, 2026 and the date on which the investment in a QOF is relinquished (known as the capital gain deferral piece).
  2. If the investor holds the investment in the QOF for longer than 5 years then there is a 10% bonus exclusion of the deferred income taxation on the prior capital gains. If the investor holds the investment in the QOF for longer than 7 years then the bonus exclusion bumps up to 15% (known as the tax basis step-up piece).
  3. If the investor holds the investment in the QOF for no less than 10 years, then the investor is eligible to liquidate or cash-out from the QOF free of income taxation on any new tax gains generated from appreciation of this QOF investment (known as the non-recognition of new taxation piece).

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As you can see, the rules and regulations governing QOZs and QOFs are complicated and require very detailed analysis.  All facts and circumstances should be taken into consideration when considering, and prior to making, an investment into a QOF using the QOZ program.  Should you have any questions regarding the QOZ program, please feel free to contact Nathaniel Dutt, Esq. at [email protected] or Jordan Horowitz, Esq. at [email protected], or either at 407-581-9800.