Qualified OpportuniTy Zone Program
Under the recently created Opportunity Zone program, significant tax benefits are available to most investors with eligible capital gains. Eligible capital gains include long and short-term gains realized from the sale of investments, including stock, businesses and real estate, including a personal residence. The gains must be reinvested in qualifying businesses operating within a designated Opportunity Zone.
Your business can be funded with an equity investment from any self-certified qualified entity. Such entities, known as Qualified Opportunity Funds, are derived via the reinvestment of capital gains generated by the proprietor, “friends and family” and/or other outside investors, including funds being raised to make investments in businesses in designated Qualified Opportunity Zones. In all cases, realized capital gains must be reinvested in a Qualified Opportunity Fund within 180 days.
Benefits to Tenants:
Investors in Qualified Opportunity Funds can achieve significant tax benefits for equity investments, including tax deferral and permanent tax reduction.
To remain certified as a Qualified Opportunity Fund, the Fund must hold at least 90% of its assets in Qualified Opportunity Zone property. Such property includes certain stock or partnership interests of the underlying business, and/or business property (personal and/or real property) of a Qualified Opportunity Zone business.
Example of Investor Timeline:
- Investor sells stock, a business or real estate with a $50,000 tax basis for $150,000 and realizes a capital gain of $100,000.
- Within 180 days of the sale Investor reinvests the capital gain in a Qualified Opportunity Fund. The investor retains, tax free, the $50,000 of cash representing the tax basis. The tax on the capital gain is deferred. The Qualified Opportunity Fund subsequently invests in a business (or businesses) located in a Qualified Opportunity Zone.
- Year 5 – Investor receives a 10% (in this case a $10,000) step-up in basis reducing the taxable gain to $90,000. The tax on the gain remains deferred.
- Year 7 – Investor receives an additional 5% (in this case $5,000) step-up in basis, further reducing the taxable gain to $85,000. The tax on the gain remains deferred. An investor needs to reinvest realized capital gains in a Qualified Opportunity Fund by 12/31/2019 to achieve Year 7 benefits.
- At December 31, 2026, the deferred tax on the reduced taxable gain of $85,000 is due.
- Year 10 and beyond – Investor would not owe federal and perhaps state tax related to post acquisition appreciation on its interest of the Qualified Opportunity Fund when such gain is realized.
- December 31, 2047 – The Opportunity Zone Program terminates.