Qualified Opportunity Zones (QOZ).


We have recently received a number of questions regarding Opportunity Zone investments. Although they were created under the Tax Cuts and Jobs Act of 2017 (TCJA), very little has been discussed about them until this year, mainly due to the time necessary for local, state, and federal government agencies to identify the Qualified Opportunity Zones (QOZ). There were over 8,700 QOZ identified across the United States, with 52 of them being in Ohio.


One of the significant implications of the TCJA was the creation of Qualified Opportunity Funds (QOF). QOF invests in projects in Qualified Opportunity Zones.  The idea, or governmental enticement, is to provide tax incentives for people to invest in projects that attempt to spur growth or affordable housing in economically disadvantaged parts of the U.S. landscape.


There are three distinct income tax advantages of investing in QOF:

#1:  Deferral of capital gain on the sale of any asset used to fund the QOF

#2:  Step-up in basis of the original basis

#3:  Elimination of potential capital gain on the QOF


Of course, there are specific rules that should be closely followed:


The deferral of the capital gain (Advantage #1) on your initial investment that was sold to fund the QOF is dependent on making sure that, at least, the gain was reinvested within 180 days into a QOF. The deferral will be through 2026, or the date the QOF is sold, whichever comes first.


The income tax basis of the original investment is stepped-up (Advantage #2) by 10% if you hold the QOF for five years.  After holding the QOF for two additional years, the income tax basis is increased an additional 5%; however, these holding periods must be met by December 31, 2026. Thus, to receive the entire 15% step-up in basis, the investment would need to be made before the end of 2019. You can still receive the 10% step up in basis so long as the investment into the QOF is made by year-end 2021.


If you hold the QOF investment for at least 10 years, any capital gain tax on the sale of the investment is eliminated (Advantage #3).


Investment opportunities that are primarily driven by income tax saving opportunities can be a precarious scheme.  The income tax incentives could influence people to ignore the true risks of the QOF investment. Think about it, the government is attempting to persuade you to deploy capital in economically distressed areas. While the potential income tax benefits are significant, they still pale in comparison to the primary driver of whether to make an investment – that the potential investment return is worth the risk.


For more information or a question about the article, please contact us.