Qualified Opportunity Zones (OZones)

  • According to the IRS, An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
  • Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.
  • No, they are new. The first set of Opportunity Zones, covering parts of 18 states, were designated on April 9, 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
  • Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.
  • Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
  • A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
  • Though Opportunity Zone designations expire at the end of 2028, investors can keep their investments in funds through December 31, 2047 without losing any of the tax benefits, even if the zone loses its eligibility in the interim.
  • A substantial improvement to the building is measured by the QOF’s additions to the adjusted basis of the building (excluding the land).
  • The QOF is not required to separately substantially improve the land upon which the building is located.
  • To ‘‘substantially improve’’ a property, an O Fund (or subsidiary) must make additions to basis with respect to such property during a 30-month period in the hands of the O Fund (or subsidiary) that exceed the basis at the beginning of the 30-month period.
  • A partnership may elect to defer all (or part) of a capital gain. If an election is made, the elected deferred gain is not included in the distributive shares of the partners. If the partnership does not elect to defer gain, a partner generally may elect its own deferral with respect to the partner’s distributive share. The partner’s 180-day period generally begins on the last day of the partnership’s taxable year.

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