The 2017 Tax Cuts and Jobs Act (2017 Tax Act) provides for an investment vehicle that allows you to defer paying tax on capital gains realized from the sale of capital assets. This investment vehicle is a Qualified Opportunity Fund (QOF). The opportunity zone program was created to encourage taxpayers to invest in business activities that bring economic growth to economically distressed areas. Our team can develop tax strategies to defer paying tax on capital gains realized from the sale of capital assets.
Qualified Opportunity Zone properties are invested into through Qualified Opportunity Funds. To qualify for tax deferral benefits, investors must place the capital gains into a Qualified Opportunity Fund within 180 days of realizing the gain. These benefits apply to individuals as well as corporations and flow-through entities. There is no limit to the amount of capital gains that can be deferred by reinvestment into a Qualified Opportunity Fund.
There are various levels of tax benefits that can be achieved under these rules, depending on the timing of the investment in a Qualified Opportunity Fund. These tax benefits include:
· Gain deferral: Gain from the sale of assets reinvested in a Qualified Opportunity Zone Fund are deferred until the earlier of (a) sale of the interest in the QOF or (b) Dec. 31, 2026.
· Gain elimination: Depending on how long an investment in a QOF is held, you may be able to permanently eliminate part of the gain. If the investment is held for 5 years, 10% of the deferred gain is eliminated. If the QOF investment is held for 7 years, then 15% of the original gain is eliminated from taxable income.
· Tax elimination on appreciation: If you hold the investment for at least 10 years, you can step-up the basis of the Qualified Opportunity Fund investment to the fair market value on the date you dispose of it; therefore, no tax would apply to gain on the sale of the investment.