A newly created tax incentive program established by the Trump administration in Fall 2017 called The Tax Cuts and Jobs Act of 2017 (TCJA) offers substantial tax breaks to business and real estate investors who are willing to make long-term investments in low-income disadvantaged communities across the country referred to as Qualified Opportunity Zones (QOZ).
This regentrification program, designed by the federal government in collaboration with governors and state senators, has identified distressed areas throughout the country as Qualified Opportunity Zones. In the state of New Jersey, there are 169 QOZs located in 75 municipalities. An interactive map identifying the location of each zone across the U.S. is available online: https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml
Established as a mechanism to provide investors favorable tax treatment for investing in Opportunity Funds, the program enables capital to benefit businesses and real estate in the Qualified Opportunity Zones. The longer the investment period, the more beneficial the tax incentive. Below is a chart describing the benefits of the program.
|Investment Length||Benefits Received|
|Fewer than 5 years||Deferred payment of existing capital gains until the date that the Opportunity Fund investment is sold or exchanged.|
|5 – 7 years||Benefits above +10% of tax on the existing capital gain is cancelled.|
|7 – 10 years||Deferred payment of existing capital gains until December 31, 2026 or the date that the Opportunity Fund investment is sold or exchanged (whichever comes first). +15% of tax on the existing capital gain is canceled.|
|Greater than 10 years||Investors pay no capital gains tax on the Opportunity Fund investment (investments are exempt from any capital gains beyond those which were previously deferred)|
A Qualified Opportunity Fund (QOF) is an investment vehicle that is set up as a partnership or corporation and limited to investing in eligible property located in a QOZ. Investor gains must be used to fund the QOF. Loans are NOT eligible for tax incentives. There are specific rules and steps necessary for taxpayers to follow in order to qualify for tax benefits, including:
- Ensure the property is in the Opportunity Zone.
- Gains from sales of QOFs must be reinvested within 180 days.
- Any invested amount in excess of the gain from the QOF is not eligible for any deferral.
- The partnership or the ownership entity must certify its QOF status by presenting the appropriate tax form at the time its tax return is filed.
A QOF must invest at least 90% of its assets in QOZ properties under the following restrictions:
- Assets must be acquired after December 31, 2017.
- Assets acquired must be from an unrelated party.
- The QOF should substantially improve the property.
- The QOF must invest substantially all of it’s equity proceeds in QOZ during the QOF’s holding period.
Those who plan on investing into a QOF should be certain the fund is properly structured in order to take the advantage of receiving all benefits of the program. Maximizing the benefit of the exclusion is available upon the sale of an investment in a QOF with a holding period in excess of 10 years.
IRS guidance has yet to be issued on this new law and regulations are expected to be solidified by the end of the 3rdquarter of 2018. Real estate professionals should understand the Qualified Opportunity Zones in their area. This is a great vehicle for brokers to educate their clientele of the advantages of buying in these areas. This will be good for your business, your clients and your state.