A Qualified Opportunity Zone (QOZ) allows for a corporation / partnership to invest capital gains into a qualifying property and realize the following tax advantages:
- Deferral of taxes until 2026 on capital gains invested.
- Reduction in taxable basis (capital gains invested)
- Year 5 (10%)
- Year 7 (additional 5% for adjusted basis of 85%)
- If underlying investment is held at least 10 years, fair market value can be elected at time of sale (therefore tax-free sale can be realized).
When to invest in a QOZ?
The time to invest is now! Ideally within the next few years, before the reduction in taxable basis is no longer afforded (after 2021). It is important to note that qualifying capital gains must be rolled over to the QOZ Fund within 180 days of being realized.
How to make a QOZ investment work for you…
Commit qualified capital gains for a period of at least 10 years, after which the initial capital can be recovered along with any potential appreciation tax free! In addition to the capital invested in the underlying asset, qualifying capital gains invested in a QOZ fund afford the investor tax planning and avoidance opportunities (year 2026) that would otherwise be unavailable.
In order to comply with IRS guidelines, the underlying investment must be within a designated QOZ and the property must be “substantially improved.” This provision simply means the value assessed to “structures & improvements” at acquisition must be invested towards development of the property within any 18-month period.
IRS Guidance on QOZ’s
The IRS has a lot of helpful information regarding QOZ’s including this FAQ section found here: