The 2017 Tax Cuts and Jobs Act introduced a new federal Qualified Opportunity Zone (“QOZ”) program. Where traditional 1031 like-kind exchange are comprised of only tax deferral elements, the QOZ program features both tax deferral as well as permanent savings components (if certain holding periods are met). The QOZ program offers taxpayers a unique opportunity to divest out of their concentrated appreciated asset positions moving the associated capital gain into other investment opportunities. If you are holding appreciated capital assets (“ordinary” gain assets are non-eligible) a QOZ might be an opportunity to reduce your federal tax liability.
There are additional costs required when individuals invest in QOZ’s, however, these costs are less than or comparable to the troublesome ‘qualified intermediary’ requirements pertaining to like-kind exchanges. Additionally, the investment must be made into one of the nation’s designated opportunity zones (LINK to view US zones: https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml) made via a qualified opportunity fund. Funds have a relatively straightforward formation and self-certification process, giving investor a choice in both entity type and the number of investors (single or multiple).
There are also timing restrictions, generally requiring an investor to reinvest into a qualified opportunity fund within a 180-day reinvestment period, allowing for the deferral of the original gain reporting until the earlier of Dec. 31, 2026 or the date the QOZ investment is sold. In addition to this gain deferral the investor can permanently exempt 10% to 15% of the original gain, after holding the investment for 5 and 7-years respectively, as well as, 100% of the post-reinvestment gain after holding the investment for 10-years.
Please contact S&G if you have questions regarding this material or the potential savings opportunities available under the federal Qualified Opportunity Zone program.