Qualified Opportunity Zones (QOZs) have attracted significant attention as a potential major source of untapped capital to revitalize underserved communities and as an outlet for investors to preserve capital gains by unlocking substantial tax incentives, while potentially generating additional investment yields.
Enacted as part of the 2017 Tax Cuts and Jobs Act,¹ the Opportunity Zones (OZones) program was established to encourage social advancement and private investment in low-income communities to aid job creation and new business formation. The program incentivizes investment by allowing for the deferral of capital gains, reducing tax obligations on a portion of those gains and, most notably, allowing QOZ investments to grow tax-free.
To qualify for the tax benefits, capital gains must be reinvested in a Qualified Opportunity Fund (QOF) within 180 days of the sale or exchange of almost any asset. The QOF must in turn make investments in a business or property located within a QOZ that has been designated by the U.S. Department of Treasury (Treasury). There are thousands of QOZs nationwide, in both urban and rural areas.
There are three noteworthy potential tax benefits:
This program holds appeal for a broad array of taxable investors, including:
Although a number of asset managers have already begun raising capital and closing deals, critical uncertainties in the first set of rules left substantial capital anxiously awaiting further guidance. On October 19, 2018, Treasury and the Internal Revenue Service (IRS) issued proposed regulations,2 most of which can be relied upon immediately. Overall, the proposed rules promote versatility and have provided much needed clarity required by investors seeking to deploy capital into QOZs.
For more information, download the full report below.
Please note that, in April 2019, an additional proposed regulation concerning the QOZ was issued. The newly released proposed regulation clarifies the “substantially all” requirements for (1) the holding period, and (2) the use of the tangible business property. Please see the April 18, 2019 update in our Tax Update section for further details.
1 Section 1400Z, H. R. 1-115th Congress (2017 – 2018)
2 Proposed regulations under section 1400Z-2 of the Code that would amend the Income Tax Regulations (26 CFR Part 1). Section 13823 of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2184 (2017) (TCJA) and Rev. Rul. 2018-29 (released October 19, 2018)
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.