In 2017, the Internal Revenue Service promulgated regulations which provide significant tax savings for investments made in businesses located and operated in Qualified Opportunity Zones (“QOZ”). A QOZ includes low-income communities, for which the federal government provides certain tax benefits to encourage investment in these communities. Each State nominates an area to be a QOZ, which must then be approved by the Department of Treasury. For the most part, a QOZ remains qualified for 10 calendar years, unless there is a designated change.
If a party or entity has a capital gain from the sale or exchange of existing property (either real or personal, including stock investments, equity investments, etc.), it can defer that capital gain if within 180 days that money is invested in a Qualified Opportunity Fund (“QOF”). If the taxpayer maintains the investment in a QOF for at least 5 years, the basis of the original capital gain will be increased by 10%, and if the investment remains for at least 7 years, the basis will be increased by 15%. This means that it is possible that 15% of the capital gain will be forgiven if the investment qualifications are met.
A QOF is any investment in qualified opportunity-owned property. Such property is defined as (a) a Qualified Opportunity Zone Stock; (b) a Qualified Opportunity Zone Partnership Interest; or (c) a Qualified Opportunity Zone Business Property.
Qualified Opportunity Zone Business Property is tangible property used in a trade or business of the QOF.
The regulations can be quite complex; however, the tax-savings can be significant. The savvy investor will realize a deferment on the payment of his capital gains on the federal level, as well as potential forgiveness of up to 15% of that capital gain if the money is invested in an entity which operates or invests in businesses which conduct business within a QOZ. It is similar to the tax-saving devices offered under a 1031 Real Property Exchange. However, it has more advantages than that in that the 1031 Exchange is merely a deferment of the payment of the capital gains, wherein this investment could result in a credit.
The attorneys at Lavery, Selvaggi, Abromitis & Cohen provide advice to developers and business people seeking investments including ways to realize potential tax savings. If you are interested in exploring this potential tax-saving device further, please do not hesitate to contact our law firm.
This article is not intended to provide legal advice as a substitute for seeking professional counsel.