Qualified Opportunity Zones
By Peter Ciriello CCIM CBI
Qualified Opportunity Zones or "O-Zones" are new with Trumps new tax plan (the Tax Cuts and Jobs Act) in 2017, and they provide preferential tax treatment to anyone following the rules of the IRS code. The aim of O-Zones is to help direct resources to low-income communities, but since these zones are based on Census tracts, they missed the mark somewhat.
Regardless, investing in O-zones can provide the following three tax incentives to investors:
1. Deferral of capital gain of funds sold (down-leg) to get into an O-Zone investment.
2. Possible reduction of the amount of gain realized on funds sold (down-leg) to get into an O-Zone investment.
3. Possible permanent exclusion of gain on the appreciation for the interest in an O-Zone investment (up-leg).
In order to invest into an O-Zone investment, a corporation must be created as the fund (called the Qualified Opportunity Fund), the property or business must be located in the designated location or tract of the O-Zone, and funds must hold 90% of assets in the zone and are self certified. Presently there is no cap on the amount of money that can be invested into a fund.
Below is a table that outlines the benefits based on the length of time in with the investment in an O-Zone is held:
Regardless, investing in O-zones can provide the following three tax incentives to investors:
1. Deferral of capital gain of funds sold (down-leg) to get into an O-Zone investment.
2. Possible reduction of the amount of gain realized on funds sold (down-leg) to get into an O-Zone investment.
3. Possible permanent exclusion of gain on the appreciation for the interest in an O-Zone investment (up-leg).
In order to invest into an O-Zone investment, a corporation must be created as the fund (called the Qualified Opportunity Fund), the property or business must be located in the designated location or tract of the O-Zone, and funds must hold 90% of assets in the zone and are self certified. Presently there is no cap on the amount of money that can be invested into a fund.
Below is a table that outlines the benefits based on the length of time in with the investment in an O-Zone is held:
Investment Example
In 2018, an individual investor sells 1,000 shares of Apple stock that they purchased in 2012 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead of paying the $238,000 in federal capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified Opportunity Fund that invests the capital in newly issued preferred stock shares of various operating
businesses located in Opportunity Zones with a plan to liquidate the fund in 2028. The assumed value of this investment in 2028 is
$2 million. The benefits received by this investor include:
• Investing $1 million instead of the $762,000 that would be remaining if the capital was not
re-invested into an Opportunity Fund.
• Paying $202,300 in taxes in 2026 instead of paying $238,000 in 2018.
• Owing no additional tax on the $1 million in capital gains on the Opportunity Fund investment
realized in 2028.
In order to find O-Zones, click here to see an interactive map.
In 2018, an individual investor sells 1,000 shares of Apple stock that they purchased in 2012 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead of paying the $238,000 in federal capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified Opportunity Fund that invests the capital in newly issued preferred stock shares of various operating
businesses located in Opportunity Zones with a plan to liquidate the fund in 2028. The assumed value of this investment in 2028 is
$2 million. The benefits received by this investor include:
• Investing $1 million instead of the $762,000 that would be remaining if the capital was not
re-invested into an Opportunity Fund.
• Paying $202,300 in taxes in 2026 instead of paying $238,000 in 2018.
• Owing no additional tax on the $1 million in capital gains on the Opportunity Fund investment
realized in 2028.
In order to find O-Zones, click here to see an interactive map.
