Qualified Opportunity Zones (QOZs) allow investors to defer or abate capital gains by investing in “low-income communities” as designated by census tracts. In October, the IRS shared more details about Section 1400Z, a provision in the 1,097-page Tax Cuts and Jobs Act that initially did not receive much attention.
The idea is boost investment and spur economic development in neighborhoods that have been down on their luck. States were allowed to designate up to 25 percent of census tracts as well as contiguous low-income communities. In California, the state has provided resources to identify the 879 Designated QOZs.
What are the tax benefits of QOZs?
The first is being able to defer paying tax on capital gains. Second, if a taxpayer holds the investment for five to seven years, the IRS forgives some of this deferred gain (generally a 10 to 15 percent exclusion).
The regulations include an end date of December 26, 2026, so as time goes by the benefit decreases.
In addition, a stepped-up basis is available if an investor holds onto an investment (for example, a formerly abandoned building turned into office space for a letterpress operator and photographer) for at least 10 years.
What is required to set up a Qualified Opportunity Fund?
A partnership or corporation can self-certify by filing a 8996 with its tax return – the IRS plans to issue a final version of the form in December 2018.
This designation that allows the entity to invest in eligible property located in the QOZ. It is not necessary to live or work in a QOZ to benefit.
Can you invest other capital gains into a Qualified Opportunity Fund?
If you sold stock at a gain, you can reinvest it within 180 days into a Qualified Opportunity Fund to defer paying tax on the gain. This election can be made when filing a 2018 tax return.
The IRS will be issuing more regulations about the tax benefits of opportunity zones in the coming months.