March 5, 2019
by Marc Wieder, CPA, CGMA
A great deal has been written about Qualified Opportunity Zones (QOZ) since the 2017 passage of the Tax Cuts and Jobs Act. There have also been countless seminars, webinars and other forms of communication attempting to educate the public on this new beneficial tax program. Also, plenty of information exists in Section 1400Z of the Internal Revenue Code.
However, despite the abundance of material available about Qualified Opportunity Zones and Qualified Opportunity Funds, my clients are still confused about the program, and what it offers. What follows are the program’s basics, in a simple-to-understand format.
What is a Qualified Opportunity Zone? In 2018, state officials designated areas under the poverty level, that required gentrification. Congress evaluated these selections, approving approximately 8,700 zone areas throughout the country.
What is a Qualified Opportunity Fund? A QOF is a corporation or partnership that invests in a QOZ, and can include LLCs taxed as partnerships.
What gain qualifies? Any gain taxed as a capital gain generated from a sale with an unrelated party qualifies. If you invest the equivalent amount of any capital gain in a QOF, the investment will qualify. Keep in mind that if you invest only part of your gain, then that is the amount that will qualify for the benefits.
Who can elect to invest gains in a QOF? Any individual or entity can elect to defer the gain and invest it into a QOF. In the case of an S-corporation or partnership (including LLCs taxed as partnerships), the entity can elect to defer the gain, or can pass the gain out to its partners or shareholders, which then can elect to defer their portion of the gain.
When do I need to make the QOF investment? You have 180 days from the time of the gain in which to invest in a QOF; this includes weekends and holidays. During the 180 days, you can do anything with the money. Unlike a 1031 exchange, the money does not have to go to an intermediary. If the gain is flowing to a partner or a shareholder from a partnership or corporation, the individual has 180 days from the end of the entity’s tax year in which to invest in a QOF.
How does a corporation or partnership become a QOF? The entity must add a Form 8996 to the tax return when filing. Yes, it is that simple.
How does one elect to defer the gain? The individual or entity files a Form 8949 with an income tax return for the year in which it elects to defer the gain.
What does a QOF do with the money? The QOF must invest the gain money, or allocate 90% of it, into a QOZ project within 180 days from the date it receives the funds.
What can a QOF invest in? A QOF can invest in property to be developed, stock in a business or partnership interest in a business or development, as long as the investment is in a QOZ.
What is a QOZ-qualified business? At least 50% of that business’ gross income must be derived from the active conduct in the QOZ. Additionally, substantially all business-tangible property must be in the QOZ. Less than 35% of its property — such as stocks — can be in non-qualified property.
What businesses do not qualify? “Sin businesses,” such as a country club, golf course, massage parlor, suntan facility, gambling facility, hot tub facility, racetrack or any business that its principal business is the sale of alcoholic beverages off premises do not qualify.
Will I still pay tax on the gain if I invest in a QOF? Yes. Tax on the capital gain deferred will be paid in 2026, regardless of when the gain was recognized. If you hold the QOF investment for five years by 2026, you will pay tax on 90% of the gain. If, by 2026, you’ve held the investment for seven years, you will pay 85% of the gain. The gain will be based on the original classification.
Can I invest other money in a QOF and get the benefits of the program? No. Only deferred capital gains qualify for the benefits.
What are other benefits? The program’s best benefit is that, if you hold your QOF investment for at least 10 years then sell it, you can elect to step your basis in the QOF investment up to fair market value. This means you would pay no tax on the gain from the QOF investment.
Marc Wieder is co-leader of the Real Estate Group at Anchin, Block & Anchin LLP.
For comments, questions or concerns, please contact Amy Sorter
Tags: Opportunity Zones