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Qualified Opportunity Zones
Written by Maria A. Gralia
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Background
- In late 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 ("Act"). The Act incentivizes investment in distressed communities by allowing the re-investment of assets, otherwise subject to a taxable gain, in a Qualified Opportunity Zone. Investors can enjoy a tax deferral and partial exclusion on the reinvested gains as provided below. Further, if the investment is held for at least 10 years, the appreciation on the investment in a Qualified Opportunity Zone is not subject to Federal income tax.
- Qualified Opportunity Zones ("QZones") are low-income communities nominated by the governors of every U.S. state and territory as areas needing reinvigoration and revitalization from reinvestment.
- The US Treasury certified the census tracts nominated by the governors in June 2018. A list of the tracts can be found here.
- In the State of Florida, there are 427 certified QZones. We have launched a web-based tool for searching and verifying locations within QZones. Launch the map here and search by address, municipality, county, or census tract.
- Investing capital gains derived from the sale or exchange of property in a Qualified Opportunity Fund ("QFund") will defer the taxes on the gains until the investments in the QOF are sold, or December 31, 2026, whichever is earlier.
Creation of a Qualified Opportunity Fund
- A QFund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a QZone.
- Investors have 180-days to re-invest cash in a QFund after sale of an asset triggering a gain.
- 90% of the QFund assets must be invested in a QZone property.
- To become a QFund, an eligible taxpayer self-certifies by merely completing a form (to be released by the IRS this summer) and attaches that form to the taxpayer's federal income tax return for the taxable year.
Definition of Qualified Opportunity Zone Property
- QZone property is property which is:
- Qualified Opportunity Zone Stock: stock in a domestic corporation that is a qualified opportunity zone business during "substantially all" of the applicable holding period, and the stock was acquired after December 31, 2017, at its original issue in exchange for cash.
- Qualified Opportunity Zone Partnership: any capital or profits interest in a domestic partnership that is a qualified opportunity zone business during "substantially all" of the applicable holding period, and the interest was acquired after December 31, 2017, in exchange for cash.
- Qualified Opportunity Zone Business Property: tangible property used in the trade or business of a qualified opportunity zone business if (i) the original use of the property commences with the QFund or, (ii) the QFund "substantially improves" the property, and the property was acquired by purchase after December 31, 2017.
- A "qualified opportunity zone business" is a trade or business in which, substantially all of its tangible property, owned or leased, is qualified opportunity zone business property;
- At least 50% of its total gross income is derived from the active conduct of its business;
- A substantial portion of its intangible property is used in the active conduct of its business;
- Less than 5% of the average of its aggregate unadjusted bases of the property is attributable to nonqualified financial property; and
- No portion of its proceeds is used to provide (including the provision of land for) any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
- The deferral period ends the earlier of:
- when taxpayer sells its investment in the QFund, or
- December 31, 2026
- If the investment is held for 5 years, the taxpayer's basis is increased by 10% of the amount of the deferred gain.
- If the investment is held for 7 years, the taxpayer's basis is increased an additional 5% of the amount of the deferred gain.
- Investments held beyond the maximum deferral date (i.e., December 31, 2026) and for a minimum of 10 years, the taxpayer's basis in its investment shall be equal to the fair market value of the investment on the date it is sold or exchanged, resulting in no additional recognized gain.
For more information, please
contact our Qualified Opportunity Fund Group comprised of attorneys in our Tax, Corporate, Real Estate and Land Development practice groups. Our attorneys are ready to assist you with setting up the fund and provide you with the latest information regarding creating a Qualified Opportunity Fund and investing in a Qualified Opportunity Zone.
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Maria A. Gralia
Land Development
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Brian J. McDonough
Real Estate/
Affordable Housing
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Curtis H. Sitterson
Tax
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Nicholas S. Risi
Corporate
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*Special thanks to Nicole Neugebauer, J.D. Candidate, May 2020, Stetson University College of Law,who assisted in the drafting of this update and to Christopher Smith, Geographic Information System (GIS) Director, who was instrumental in the creation of the web-based tool for searching and verifying locations within QZones.
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