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Opportunity Knocks . . . Know The Code To Open the Door!

Susan P. Rounds, JD, CPA, LL.M. (taxation), AEP®, TEP

Opportunity Zones are a community development program established by Congress in the Tax Cuts and Jobs Act to encourage long-term investments in low-income urban and rural communities.

The new Tax Cuts and Jobs Act enacted in December 2017 provides a potential opportunity to sell or exchange appreciated assets, invest the gain in a variety of types of business ventures within a geographically designated Qualified Opportunity Zone (QOZ), and receive potential tax benefits as a result. 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 are so certified by the Secretary of the U.S. Treasury.

Potential tax benefits of Opportunity Zones
  • Deferral of tax on realized capital gains – If gains on the disposition of a capital asset are reinvested into an Opportunity Fund within 180 days, the tax that would otherwise be due can be temporarily deferred until the earlier of December 31, 2026 or the date on which the opportunity zone investment is sold.
  • Reduction of taxes on the original gain – Potentially reduce the amount of capital gains on the sale of the original investment by 10% if held in the Opportunity Fund for 5 years and by an additional 5% if held for 7 years, for a total potential reduction of 15% after 7 years.
  • Elimination of taxes on any gain from the subsequent sale or exchange of the QOZ investment – Upon disposition of a QOZ investment that has been held for 10 years or more, all gains on the QOZ investment may be tax free. This exclusion applies to the gains accrued from the QOZ investment only. Gains on the sale of the original capital asset are treated as described above.
Some Restrictions
  • Investors have 180 days to roll a gain into a designated QOZ investment.
  • The QOZ investment must be held for 10 years or more.
  • QOZs include low-income areas, rural regions, and many urban locations that are gentrifying.
Key Factors
  • The original gain must result from a sale to an unrelated party.
  • Income taxes must be paid on the operating income of the QOZ business.
  • Ninety percent of the QOZ assets must consist of tangible business property located in the QOZ.
  • Real property renovation investments must be extensive and within 30 months of initial purchase.
Businesses That May Qualify
  • Real estate development including new buildings and old construction with significant renovations
  • Manufacturing facilities
  • Restaurants
  • Car dealerships
  • Oil and gas drilling or mining
  • Service businesses with little tangible property outside the QOZ-licensing business, ad agencies
Businesses That Do Not Qualify
  • Recreational such as golf, country club, massage, liquor stores
  • Finance-driven businesses (financial assets cannot exceed 5 percent of total assets)

Happy Reading!

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