Understanding Qualified Opportunity Zones

Qualified Opportunity Zones (QOZs) were defined under the 2017 Tax Cuts and Jobs Act and are intended to help revitalize economically distressed communities using private investments rather than taxpayer dollars. The goal of the QOZ program is to provide positive social and financial benefits for QOZ communities by spurring economic development and job creation. The QOZ program also offers private investors the chance to earn significant tax advantages in return.

QOZs are found in areas of the country, often called census tracts, that are considered economically disadvantaged and/or meet the definition of low income.

Statistics¹ show that:

• The average poverty rate in QOZs is nearly 14% greater than the national poverty rate
• The median family income for three-fifths of all QOZs is below $50,000
• Unemployment rates for QOZ residents is 31%, compared to 22% across the U.S.

With over 8,700 communities¹ identified as QOZs, this innovative investment structure offers untapped capital that can be used to revitalize under-served communities throughout the country.

A significant benefit of the QOZ program is that investors can use capital gains from the sale of any asset, not just real estate to invest in an opportunity zone. This means investors can use capital gains earned through the sale of:

• Stocks and bonds
• Mutual funds
• Jewelry and art
• Businesses
• And more

The reinvestment of proceeds earned from an appreciated asset must take place within 180 days of the original sale to defer taxes on capital gains.

In addition, all investments in opportunities zones must be done through a qualified opportunity fund, or QOF. This investment vehicle’s sole purpose is to invest in QOZ properties and is typically organized as a corporation or partnership. QOFs must hold at least 90% of their assets in QOZ businesses and assets.

In general, the QOZ program is designed for the long-term investor. It is important for investors to speak with a tax professional prior to investing.

Source:

¹ Economic Innovation Group. Opportunity Zones Facts & Figures. https://eig.org/opportunityzones/facts-and-figures

Disclosure

The qualified opportunities zone (or QOZ) program may provide substantial tax benefits for investors if certain tax requirements are met. These requirements include, but are not limited to adhering to, the defined QOZ timeline, holding the interest for minimum lengths of time and the payment of taxes on the remaining originally deferred gains within the first quarter of 2027. Perspective QOZ investors should consult with and rely on a tax professional to review all requirements and potential tax risks in depth prior to investing.

QOZ Risk Factors

There are substantial risks associated with the U.S. federal income tax aspects of a purchasing interests in a qualified opportunity fund. The following risk factors summarize some of the tax risks to an investor. All prospective investors are strongly encouraged to consult with and rely on their own tax advisors. The tax discussion here is not intended, and should not be construed, as tax advice to any potential investor.

• There is a lack of precedent and limited guidance related to qualified opportunity funds.
• A program intended to qualify as a qualified opportunity fund may not constitute a qualified opportunity fund for a variety of reasons, including a failure to substantially improve the property within the first 30 months of its operation. If a fund does not qualify as a qualified opportunity fund, then no deferral or elimination of taxable gain will be available to the its members.
• An investor must acquire his or her interest in a qualified opportunity fund on or before December 31, 2019 in order to receive a step-up in basis equal to 15% of the gain deferred by reason of the investment in the fund.
• Investors who hold interests in a qualified opportunity fund through December 31, 2026, and who have deferred gain through that time by acquiring such interests, will automatically recognize some or all of the federal income tax gain that they deferred on December 31, 2026.

The state, local and other tax implications of a qualified opportunity zone investment are unclear.