Qualified Opportunity Zones – New Tax Saving Alternatives for Investors
Introduction to Qualified Opportunity Zones.
The “Tax Cuts and Jobs Act of 2017” passed in December 2017, added Opportunity Zones to the tax code as a tool to spur economic development in distressed communities across all 50 states, the District of Columbia, and five U.S. territories. Upstate New York has multiple zones to invest in, and save taxes in.
Under the new law, new investments into these areas are eligible for preferential tax treatment.
An investor, who has recently realized a capital gain on a previous sale, can take those monies and invest in a Qualified Opportunity Fund, either by themselves or with other investors. Those investments would be used to purchase qualified real estate or businesses in the zones.
If he then held that invest, the tax on the original capital gain would be deferred until he sold it (no later than 2026) and he would also receive a 10-15 percent reduction in the original gain. In addition, if the qualified investment is held for 10 years or more, then the appreciation of that investment (real estate or active business) would be completely tax free!
There are, of course, lots of rules and requirements in order to obtain this great result.
The U.S. Treasury has issued two sets of proposed regulations to clarify the treatment, of how to proceed. (Proposed Regulations Section 1.1400Z2).
The first set of proposed regulations was issued in October 2018 and covered the general treatment of the Qualified Opportunity Zones.
A second set of proposed regulations was released in April 2019, and gave us more details on the required investments.
Finally, a third set of proposed regulations is coming, most likely sometime in the fall/winter of 2019, to answer specific questions previously raised.
These regulations include requirements on new vs. redeveloped real estate, designation as a qualified opportunity business and testing safe-harbor levels.
There will certainly be challenges and restrictions; however, the benefits of:
- Tax deferrals for 7 years;
- Tax reductions after 5 years; and
- Tax elimination after 10 years.
Can be well worth the effort.
Let us know if you would like to know more about these new investment vehicles or have any questions.