Defining Qualified Opportunity Zone Property
- Posted: June 4, 2019
- Posted by: Travis Lynk
- Last Reviewed: June 4, 2019
Investors with capital gains have a new way to minimize the bite of capital gains taxes. Under the Opportunity Zone program created in the 2017 Tax Cuts and Jobs Act, taxpayers can invest untaxed capital gains in a Qualified Opportunity Fund and defer capital gains taxes until December 31, 2026. In addition, capital gains taxes are reduced by 10% if the investment is held for five years, and reduced to a further 15% if the investment is held for seven years. There are no capital gains taxes on appreciation of Qualified Opportunity Fund assets held at least 10 years.
Additionally, Qualified Opportunity Funds invest in economically distressed communities, putting private equity to work in neighborhoods that need it the most. It’s a win-win situation for taxpayers and the residents of marginalized districts.
The key to unlocking these tax breaks lies in investing in qualified Opportunity Zone property.
What is Qualified Opportunity Zone Property?
Qualified Opportunity Zone property can take one of three forms:
- Tangible assets such as real estate in an Opportunity Zone
- Partnership interest in a qualified Opportunity Zone business
- Stock ownership in a qualified Opportunity Zone business
A qualified Opportunity Zone business is one in which substantially all the business’s tangible property is Qualified Opportunity Zone business property and which derives at least 50% of its gross income from active conduct of business within the Opportunity Zone. Taxpayers can only invest in qualified Opportunity Zone property through a Qualified Opportunity Fund.
How Can Taxpayers Invest in a Qualified Opportunity Fund?
Any investor can defer some or all untaxed capital gains from a sale of assets as long as the following conditions are met:
- The gains are reinvested within 180 days of sale of the asset or assets.
- The deferred investment is limited solely to capital gains. In other words, if an investor buys $500,000 in stock and sells it for $1 million, he may invest the entire $1 million in a Qualified Opportunity Fund, but only the $500,000 in capital gains are eligible for tax-favored treatment.
- The Qualified Opportunity Fund meets all requirements for qualified status.
Note that only equity investors are eligible for tax incentives. Loans to the fund do not qualify.
How Does an Opportunity Fund Achieve “Qualified” Status?
Several rules apply to Qualified Opportunity Fund status:
- It must be organized as a corporation or partnership with the express purpose of investing in qualified Opportunity Zone property.
- At least 90% of the fund’s assets must be invested in qualified Opportunity Zone property.
- Property acquired by the fund must be “substantially improved” within 30 months of purchase, or commence “original use” in the Opportunity Zone within 30 months.
- The fund must spend at least 100% of the purchase price of an existing property (excluding the cost of land) on improvements to meet the “substantially improved” test.
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