When the new Tax Cuts and Jobs Act (TCJA) was enacted into law in December of 2017, it contained many new provisions and incentives that are still evolving.

One tax incentive that is included in TCJA was designed to encourage long-term growth and economic development in economically distressed neighborhoods called Qualified Opportunity Zones, or QOZ. Because this is such a hot topic, we are providing an overview of some of the key elements. However, this is not a complete and detailed assessment. To understand this aspect of TCJA as it relates to your unique situation, we will be happy to schedule a confidential consultation at your convenience.

When enacted by Congress, it was anticipated that by offering a tax incentive to invest in QOZ, it would lead to greater business development including the creation of jobs in these economically distressed communities.Further, the good news is that investing in Qualified Opportunity Fund (QOF) provides an alternative way to defer taxable capital gains that are applicable to the sale of any appreciated property used in business, or held for investment.

What is a Qualified Opportunity Fund?

A Qualified Opportunity Fund can be any corporation or partnership that is organized within the fifty states for the sole purpose of investing in QOZ property, and must elect to be treated as a QOF at any time after December 31, 2017. The QOF election is done through self-certification, by attaching a form to the entity’s timely filed tax return.

Among other requirements, at least 90% of the QOF’s assets must be QOZ property (QOZ Business Property, QOZ Stock, or QOZ Partnership interest).

What kind of income can be deferred?

Tax acts are known for their complicated language and parameters, but in a nutshell, some or all of capital gain from the sale or exchange of property to an “unrelated party” can be deferred by investing in a Qualified Opportunity Fund within 180 days of the sale of the property. The guidelines are as follows:

  • Only capital gains are eligible to be deferred
  • The gain deferred can be any capital gain, including: Short-term, or long-term capital gains, Collectibles gains, Unrecaptured Section 1250 gains, Net Section 1231 gains, or Capital gain from IRC Sec. 1256 contracts.
  • The taxpayer can invest in multiple QOF investments as long as the 180-day investment period requirement is adhered to.

How long can the Gain be deferred?

The taxpayer must recognize the gain and include it in its income the earlier of the date on which the investment is sold, or December 31, 2026.

What are other tax incentives for investing in QOF?

There are more important tax incentives in this tax provision.

  • If the taxpayer holds the investment for five years, before December 31, 2026, there is a 10% reduction in the deferred capital gain
  • If the taxpayer holds the investment for seven years, before December 31, 2026, there is a 15% reduction in the deferred capital gain

In summary, if a gain on the sale of property is reinvested in a QOF within the required time frame, investors may be able to decrease the taxable portion of the originally deferred gain by 15% if the investment is held seven years or more by December 31, 2026.

Furthermore, if the taxpayer holds onto the investment for at least ten years, there is no tax on the appreciation of the investment.

There are plenty of questions!

There are a wide range of tests, requirements and substantiations that accompany the tax deferrals for investments in a Qualified Opportunity Zone and the use of Qualified Opportunity Funds. That said, if you are interested in learning more about the ability to defer paying taxes on your capital gains, please feel free to call us at 973-994-9494 or email us at:

Mariana Moghadam
Mariana.Moghadam@SobelCoLLC.com

Mary Ford
Mary.Ford@SobelCoLLC.com