The Tax Cuts and Jobs Act (TCJA) brought many changes. One of them might benefit both the community and investors. It’s the Qualified Opportunity Zone (QOZ) credit. Investors have an opportunity to invest in low-income business communities, defer capital gains and potentially gain a tax-free investment.
Three possible benefits of the new Qualified Opportunity Zone Credit are:
- Deferring capital gains
- Reduction in tax on investment
- Federal tax exemption
Deferring Capital Gains
Individuals and corporate taxpayers can defer capital gains on the sale of stock, business assets or any other property by investing part or all of the proceeds in a Qualified Opportunity Fund (QOF). The investment must be made within 180 days of the sale or exchange. The timing is critical and the deferred gains are taxable when the credit expires on December 31, 2026 or when the investment in the QOF is sold prior to the expiration date. That means investments made before December 31, 2019 will achieve the greatest tax benefits; however, this tax structure may still be beneficial to investors over the next few years.
Reduction in Tax on Investment
Reduction in tax is dependent on the long-term investment in the QOF. If an investment in a QOF is held for five years, 10 percent of the original deferred gain will be forgiven. If the investment is held for seven years, then a total of 15 percent will be forgiven. This means that if an investor had deferred $1,000,000 in gains by investing in a QOF in 2019 they would only have $850,000 in reportable gains in 2026 when they are required to recognize the deferred income under the new tax provision.
Federal Tax Exemption
For an Opportunity Fund investment held for 10 years, the new investment’s tax basis becomes the fair market value on the sale. Therefore any appreciation above the original deferred gain achieved in the QOF is not taxed. Qualified Opportunity Zones are a great way to invest in a growing area and gain tax benefits. To learn more about the credit and how to take advantage of it, contact Partner Kendra Stribling, who is heading up our real estate and development niche. 434.296.2156.