On December 22, 2017, Congress adopted legislation including Qualified Opportunity Zones as part of the Tax Cuts and Jobs Act, which provides for deferral of long-term capital gains tax and, in some cases, a significant step up in basis and elimination of long-term capital gains. This little-known, rarely-mentioned provision in the $1.5 trillion tax cut is projected to save investors $1.6 billion in capital gains taxes over the next 10 years – to say nothing of the exceptional returns that investors can make on well-advised investments. Opportunity Zones present a compelling investment opportunity.
"Opportunity Zones have the potential to become the most impactful federal incentive for equity capital investment in low-income communities ever enacted."
- Letter to Acting Commissioner of the IRS, June 18, 2018.
Selection of Qualified opportunity Zones
Governors of each state designated 25% of low income census tracts in each state. The Secretary of the Treasury confirmed the QOZ census tracts on June 20, 2018. QOZ designations last 10 years. To qualify for tax deferral, an investor’s capital gains must be reinvested into a Qualified Opportunity Fund within 180 days from the date of the sale or exchange that generated the capital gain.
Defer Taxes; Increase Basis; Full Step Up at Sale
• QOZ investment can be used to (i) defer capital gains, (ii) increase the basis of original capital gains amount, and (iii) avoid capital gains on new investments.
• Investors can defer tax on capital gains until the earlier of (i) the date the investment is sold or (ii) December 31, 2026.
• Long-term investment is incentivized by allowing for a step-up in basis:
10 percent increase in basis of the original capital gain
Additional 5 percent increase in basis of the original capital gains
Increase in basis in QOF equal to the FMV of the investment on the date the investment is sold