Chloe Copple, CEPA, Business Exit Planning Advisor
In 2017, the Tax Cuts and Jobs Act was signed into law, passing a new tax incentive called Qualified Opportunity Zones. This program certified distressed low-income communities throughout the United States to qualify for new federal tax incentives. These “zones” were chosen by governors who identified areas within their communities that met certain criteria.
Investing in these zones gives investors the opportunity to roll capital gains into a QOZ fund to defer capital gains tax. Unlike other investment options geared toward deferring capital gains in real estate such as Delaware Statutory Trusts and 1031 Exchanges, investments in QOZs allow for contributions of the gain portion from the sale of stocks and partnership interests in addition to real estate. In a QOZ, you defer the capital gain tax from the sale of the initial asset until 2026 and if the QOZ is held for 10 years, any gains in the QOZ investment pays no capital gains tax.
Why would I invest in a QOZ?
- Investment Intent – You have highly appreciated assets that you are planning to sell and you’d like to defer the capital gains tax.
- Objective Alignment – You have an interest in investing in low-income communities to spur on economic activity and development.
- Timing – You’d like to diversify your investment portfolio and can bear the 10-year illiquidity period of QOZs to take advantage of the gains deferral. Also, notably, these funds are set to expire in 2047, making 2037 the last year to make an initial investment.
How do Qualified Opportunity Funds (QOFs) work?
QOFs are built with the sole intent of investing in designated QOZs to improve communities and spur economic growth. They must:
- Be certified by the U.S. Treasury Department.
- Hold 90% of their assets in a specified QOZ. Properties and businesses that make up that 90% of assets must be substantially improved by the QOF within a 30-month period.
- Hold the investment in the Fund for 10+ years to defer capital gains taxes on any additional gain to your investment (Your original gain invested in the QOF is still subject to capital gains taxes, but they are deferred until 2026).
Given the novelty of this investment opportunity, it can be difficult for investors to assess the reputation of available funds. Track records of QOFs only date back to the Tax Cut and Jobs Act in 2017. Moreover, investing in developing areas has certain risks. Identifying a trusted partner is key.
Your team of advisors and professionals will help make sure you’re maximizing this potential tax benefit and exploring an option that meets your goals and fits into your current investment portfolio, aligning with your and your family’s risk tolerance.
To learn more about if QOZs could be the right opportunity for you, reach out to our team today.
Chloe is a non-registered associate of Cetera Advisor Networks.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
Neither Cetera Advisor Networks LLC nor any of its representative give legal or tax advice.
