Created to encourage economic growth and investment in low-income and economically distressed communities, the Tax Cuts and Jobs Act brought a new tax incentive for investors to consider – Qualified Opportunity Funds (QOF). With this new incentive, taxpayers, including individuals, C corporations, S corporations, partnerships, and trusts and estates, are now able to defer paying tax on capital gains by investing them into a QOF, which in turn invests those funds within a Qualified Opportunity Zone (QOZ).
While the interest level from investors was initially high, so was the uncertainty. However, with two sets of proposed regulations issued in 2018 and 2019, these uncertainties were lifted. As a result, financial advisors, developers and taxpayers have begun exploring how to take advantage of this tax-friendly investment opportunity.
There are three key tax benefits investors gain from investing in a QOF, including:
To help ensure the QOFs ultimately deploy capital into a Qualified Opportunity Zone Business (QOZB), these are the requirements, generally, to consider:
A QOF may also indirectly meet the 90% threshold by conducting a QOZB through a subsidiary by holding QOZ stock or partnership interest.
As mentioned above, gain is recognized on the earlier of the date that the QOF investment is sold or exchanged, or on Dec.31, 2016. “Sold or exchanged” includes any transaction that reduces the QOF investor’s equity interest, including:
There are several watershed dates in the QOZ regime, including Dec. 31, 2019. Why? In order to get the full 15% tax reduction on eligible gains, QOZ investments needs to be made on or before Dec. 31, 2019.
As you approach year end, now may be the time to explore how opportunity zones can help improve your overall tax strategy. To learn more, contact Doeren Mayhew’s dedicated Tax Group today.
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