Would it surprise you to learn that qualified opportunity zones (QOZ) receive preferential tax treatment? Our tax planning services include informing you of the latest and most relevant updates, including those regarding QOZs.
One of the goals of the TCJA was to encourage private investments in areas of the country that are economically disadvantaged. To encourage this type of investment, each state has designated and continues to identify, areas as QOZs. Financial services firms then followed suit by creating qualified opportunity funds, vehicles for investing in QOZs.
Here’s what you need to know about QOZs to determine if a qualified opportunity fund is a right investment for you.
What is a Qualified Opportunity Zone (QOZ)?
The official IRS definition of a qualified opportunity zone is, “an economically-distressed community where new investments under certain conditions, may be eligible for preferential tax treatment. Localities qualify as QOZs if they have been nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the IRS.”
Qualified Opportunity Zones Tax Benefits
A major advantage of investing in a QOZ is that taxes on long-term capital gains can be deferred by investing those gains in a QOZ fund, provided the investment is made within 180 days of the event that triggered the gain. These gains can be deferred until the earlier of December 31, 2026, or the date the QOZ fund is sold or exchanged.
The benefits of investing in a QOZ fund increase the longer you hold the fund. If the fund is held for at least five years, the deferred gain is reduced by 10%. Hold the investment for seven years, and the deferred gain is reduced by 15%. The biggest benefit of QOZs occurs when the investment is held for ten years. After ten years, gains from selling the QOZ investment are tax-free.
Are Qualified Opportunity Funds Right for You?
The idea of investing in an area close to home that needs help appeals to a lot of investors, but you don’t have to live in a QOZ to take advantage of their tax incentives. People who are looking to recognize substantial capital gains through the sale of small business or commercial real estate will find QOZ funds alluring.
The IRS is continually updating the guidance on QOZ funds. As with any area of tax, it’s important to ensure tax laws and guidelines are followed, otherwise, you risk negating the intended benefits. As with other investments, when considering QOZ funds, it’s important to contemplate things like fees and the illiquidity of the investment when determining if it’s right for you.
There’s a lot to learn about QOZs when determining if they’re right for you and your tax planning strategy. If you’re considering investing in a qualified opportunity zone or would like to learn more about our tax planning services, schedule a call today.