Qualified Tax Opportunity Zones
Overview
The Tax Cuts and Jobs Act introduced IRC §1400Z-2 Special Rules for Capital Gains Invested in Opportunity Zones. This section allows a taxpayer to elect to defer or exclude from gross income gain on the sale or exchange of any property to an unrelated party in the tax year of the sale or exchange if the gain is reinvested in a qualified opportunity zone (“QOZ”) within 180 days of the sale or exchange. The amount of gain that can be deferred or excluded is equal to the amount of gain invested in the QOZ.
Qualified Opportunity Zones are nominated as such by the chief executive officer of a state, and certified by the Secretary of Treasury. A “state” includes any U.S. possession and a “chief executive officer” generally refers to a state’s governor. The designation as a QOZ remains in effect for 10 years beginning on the date of designation.
- For a list of all designated Qualified Opportunity Zones, click here.
- For a map of all designated Qualified Opportunity Zones, click here.
Deferral/Exclusion of Gain
The election allows the gain to be deferred until:
- The investment is sold or exchanged, or
- December 31, 2026, whichever is earlier.
When the taxpayer reinvests in a QOZ property, the basis in the investment is initially zero. However, basis can be increased by holding onto the investment for the following periods of time.
- 5 years – basis is increased by 10% of the gain originally deferred.
- 7 years – basis is increased by 15% of the gain originally deferred.
- 10 years – basis is increased to be equal to the FMV of such investment on the date it is sold. There are some complications with this adjustment because of the sunset date mentioned above.
Definitions
- Qualified Opportunity Fund – Any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in QOZ property that holds at least 90% of its assets in QOZ property.
- Qualified Opportunity Zone Property – Includes property which is:
- QOZ Stock
- QOZ Partnership Interest
- QOZ Business Property
For additional information, please contact your tax advisor at HLB Gross Collins, P.C.