By George Grzywacz, CPA, JD Shareholder

Designed to spur economic development and job creation in distressed communities the Tax Cuts and Jobs Act created Opportunity Zones along with providing a tax incentive for taxpayers to invest in them. Outlined below are the rules related to making investments in Opportunity Zone property, the types of property that qualify and how these rules may benefit you.

Special Rules for Capital Gains Invested in Opportunity Zones

A taxpayer may make an election and defer the tax on any capital gain from the sale or exchange of property with an unrelated person as long as that gain is invested by the taxpayer in a Qualified Opportunity Fund (Fund) within 180 days of the date the gain was recognized.

A Fund is an investment vehicle organized either as a corporation or a partnership mainly for the purpose of investing in a Qualified Opportunity Zone Property. To qualify 90 percent of the assets held by the Fund must be in this type of property.

What Types of Property Qualify?

Qualified Opportunity Zone Property is any of the following:

Qualified Opportunity Zone Stock: Is stock acquired for cash after Dec. 31, 2017 in a corporation conducting a Qualified Opportunity Zone Business (Qualified Business). A Qualified Business is any trade or business in which substantially all of the tangible property owned or leased by the trade or business is Qualified Opportunity Zone Business Property.

Qualified Opportunity Zone Partnership Interest: Is an interest in a partnership acquired for cash after Dec. 31, 2017 conducting a Qualified Business.

Qualified Opportunity Zone Business Property: Is tangible property purchased from an unrelated party after Dec. 31, 2017 by the Fund (or a Qualified Business). The original use of the property will be in a Qualified Opportunity Zone or the Fund will acquire and substantially improve used property within the zone.

For purposes of these rules a Qualified Business should include rental real estate as long as it is not residential rental property. However, it does not include any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other types of gambling facilities, or any store the principal business of which is the sale of alcohol.

The Fund is prohibited from acquiring the property from a “Related Party” which may prohibit a Fund from purchasing property from a Fund shareholder, partner or a related entity.

Tax Treatment of the Deferred Gain

Provided that the all of the rules and restrictions discussed above are complied with, then the deferred gain may be fully or partially realized if the investment in the Fund is sold or exchanged within the first nine years of making the election. However, if the investment is not sold by Dec. 31, 2026 the applicable deferred gain on that date is required to be realized.

If the taxpayer holds the investment for ten years or more an election may be made at the time the investment is sold to step up the basis of the investment to its fair market value on that date. Making this election may be beneficial if the value of the investment has appreciated but would not be advised if the value of the investment has declined below the taxpayer’s adjusted basis.

For more information about Opportunity Zones and how to leverage your investments in these incentivized areas, please contact our tax advisors today.