The 2017 Tax Cuts and Jobs Act (the “Jobs Act”) created a tax deferral and savings opportunity for U.S. taxpayers with realized capital gains in the last 180 days.  The tax benefits come from an investment in a Qualified Opportunity Zone Fund (“QOZ Fund”). 

To maximize the savings opportunity, taxpayers with capital gains should consult with their tax advisor and consider the benefits of investing in a QOZ Fund by December 31, 2019.  The Jobs Act allows taxpayers with capital gains to invest those gains in qualified opportunity zones (“QOZ”) and defer the payment of tax on the capital gains until 2026.  The tax benefit comes with an additional 15% reduction in the capital gains tax due, if the taxpayer keeps the funds in the QOZ Fund for the full seven years.  To qualify for the 7-year, 15% savings taxpayers must invest the gain realized in the last 180 days in a QOZ Fund.  After December 31, 2019, taxpayers will still qualify for a 5-year, 10% savings if the qualifying capital gains are invested in a QOZ Fund by December 31, 2021.

The following are some highlights regarding QOZ investments and QOZ Funds.

  • QOZ’s have been designated by each county and subsequently approved by Treasury Department.
  • Investment in QOZ occurs through QOZ Funds:
    • QOZ Fund may be a Corporation or Partnership
    • QOZ Fund must invest 90% of funds in QOZ Stock/Partnership, QOZ Businesses, or QOZ Properties
    • The QOZ Fund self-certifies every 6 months by filing Form 8996.
    • The next 90% test date is December 31, 2019
    • The QOZ Fund has 31 months to invest cash once invested in the QOZ Fund.
  • Taxpayer can invest capital gains realized on the sale of appreciated assets, reinvesting within 180 days of the sale in a QOZ Fund
  • Taxpayer may defer capital gains on invested capital until Dec 31,2016 or upon sale of fund interest.
  • Taxpayer files Form 8949 with 2019 tax return.
  • There is no need to keep funds with a third-party intermediary upon sale of the initial asset.
  • The gains are not required to be immediately and directly invested into the QOZ Fund (as long qualifying capital gains are invested with 180 days of the realized capital gain).
  • 10% tax reduction after 5 years
  • 15% tax reduction after 7 years (must invest by December 31, 2019, as noted above.
  • Tax-free stepped-up basis on all gains within the QOZ Fund after 10 years.
  • Eligible interests for investment by QOZ Fund
  • Equity interest in QOZ Fund or QOZ Business
    • Stock or Partnership Interest in QOZ Fund or QOZ Business
    • LLC Membership interest included
  • QOZ Business
    • At least 50% of gross income of QOF must be derived from conduct of trade or business within OZ.
    • Substantially all intangible property used in active conduct of business (70%) located in OZ
    • Less than 5% of average aggregated unadjusted bases of the property of such entity is attributable to nonqualified financial property.
  • QOZ Property
    • Substantially improved existing building = the improvements double owner’s basis in the building only – land not included.
    • Allocate X to land, X to building, the value of the building improvements must exceed the initial value of building
    • Substantial improvement will not cause property to fail to qualify just for not being completed.
    • Improvement to basis must exceed the adjusted basis within 30 months form the start of improvements.   
    • Ex. If an OZ Property is valued at $880,000 for the land, $1,120,00 for the building, then to qualify as a QOZ Property the QOZ Fund must make $1.3 million improvements within 30 months of the acquisition of the QOZ Property.
  • Some properties are excluded, such as golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, gambling, no alcohol for offsite consumption.

Important Disclosure:  DLT Law Group, P.A. assisted in the founding and formation of Core X OZ Fund I, LLC, a qualified opportunity zone fund formed in Florida.  This post is for information purposes and is not legal or tax advice, nor is it intended as an advertisement or promotion for Core X OZ Fund I, LLC.

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