The federal government created the opportunity zones program through the Tax Cuts and Jobs Act of 2017 to improve economic development through various tax benefits. So far, 8,700 locations have been identified all over the U.S, including rural and metropolitan regions.
Since the program's inception, billions of dollars have been injected into the qualified opportunity funds to set up businesses and other investments within the zones and federal assistance regarding taxations. Since the whole idea is relatively new, there are many questions investors are asking themselves, and here are a few.
Q. What is a Qualified Opportunity Fund?
A. A qualified opportunity fund acts as a link between investors and their investments within the opportunity zones. The QOF may result from a partnership, a corporation, or individual investment that is mandated to invest in "qualified opportunity zones property." The investor, therefore, needs to maintain a minimum of 90% of their assets in the QOZP.
Q. What Tax benefits do investors get to enjoy with the QOF?
A. Apart from sustainable community development, investors can also enjoy three main tax incentives:
Temporary Deferral; investors have the option to defer their income capital gains by reinvesting in opportunity funds. The gain should be considered when the investment has been completed the ten years before January 1, 2027.
Step-Up in Basis; if investors hold their opportunity fund for five years, they get a tax reduction of 10 percent on their initial capital gain. If they hold the investment for seven years, they get an extra 5 percent deduction exempt.
Permanent exemption: Investors can get tax exemptions when they retain their qualified opportunity fund for ten years.
Q. What should we do when our community has a designated opportunity zone?
A. When a community is identified as an opportunity zone, the residents should now focus on bringing in private investors and the most sensible investments that would benefit the community. In these zones, investors can get tax incentives for their business, which cannot happen without the community's assistance. A community can also benefit from qualified opportunity fund real estate where they can sell or exchange their homes for improvement purposes.
Q. Can Individual investors benefit from opportunity zone investments?
A. Yes, individual investors are not barred from investing in QOFs, but before this happens, you need to check what IRS requirements need to be considered. For example, specific rules should be followed when you invest on your own or hire someone to do it for you. The IRS also has a few rules concerning the amount of money you can invest individually. Therefore, before you invest in QOFs as an individual, consider the resources at your disposal and your level of involvement in the investment.
Q. Who can benefit from the tax incentives offered by QOF?
A. Tax benefits are directed to corporations, individuals, partnerships, S-corporations, trusts, and estates eligible for opportunity zone tax benefits. All gains must be capital gains gained from a sale to an unrelated party or entity and recognized for tax purposes before January 1, 2027.
Opportunity Zones are leaving investors with more questions than there are answers. We only have to rely on the IRS to address further concerns in the coming days.