Deferral and Exclusion of Capital Gains Tax with Qualified Opportunity Funds
- Posted: May 10, 2019
- Posted by: Travis Lynk
- Last Reviewed: May 10, 2019
Investment in Qualified Opportunity Funds provides taxpayers with a new way to defer and reduce capital gains tax exposure. The incentives are compelling: capital gains tax payments are deferred until December 31, 2026, reduced by 10% after five years, and reduced by 15% after seven years.
For example, a taxpayer who rolls profit from the sale of an asset in 2019 into a Qualified Opportunity Fund avoids capital gains tax payments for up to eight years, with the potential to reduce them by as much as 15%. Additionally, all capital gains tax liability from the appreciation of Qualified Opportunity Fund investments is excluded if the investment is held for at least 10 years.
What is a Qualified Opportunity Zone?
The Opportunity Zone program was created as part of the 2017 Tax Cuts and Jobs Act. The program’s purpose is to stimulate private investment in economically disadvantaged census tracts through capital gains tax incentives.
State and territorial governors nominated Opportunity Zones within their jurisdictions; the U.S. Department of the Treasury and the IRS approved the final map of Opportunity Zones in 2018.
According to the Economic Innovation Group, Opportunity Zones experienced less job creation in 2015 than in 2010. New business development declined by 6% in Opportunity Zones during the same time period.
By tapping into the potential $6 trillion in unrealized capital gains, the Opportunity Zone program seeks to create jobs and stimulate economic development in communities as yet untouched by the economic recovery experienced by the rest of the United States.
Investing in Qualified Opportunity Funds
Qualified Opportunity Funds are self-certifying entities that must be structured as either corporations or partnerships with the sole purpose of investing in qualified Opportunity Zone property.
Other requirements for Qualified Opportunity Funds include the following:
- Investments are limited to qualified Opportunity Zone property, which is defined as either qualified Opportunity Zone business property, partnership interest in a qualified Opportunity Zone business, or stock ownership in a qualified Opportunity Zone business.
- Property must be acquired after December 31, 2017.
- At least 90% of the fund’s assets must be invested in qualified Opportunity Zone property.
- The fund must either “substantially improve” a property or commence original use within the Opportunity Zone within 30 months of acquiring it.
The guidelines allow funds to choose their own focus; some may invest in a single Opportunity Zone, while others may invest across several within a particular metropolitan area, for example.
Examples of a Qualified Opportunity Fund may include a private equity fund focused on providing capital for growth to small businesses located within Opportunity Zones, a fund dedicated to financing the redevelopment of a shuttered strip mall into new retail space, or a fund focused on affordable housing development in areas devastated by Hurricane Harvey.