The Tax and Jobs Act of 2017 created a new and unique investment vehicle, called a “Qualified Opportunity Fund,” that has potentially significant tax advantages. The new tax law allows investors to direct resources to low-income communities – “Qualified Opportunity Zones” – and become eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation authority to the Internal Revenue Service. Qualified Opportunity Zones may be found here.
Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities by providing tax benefits to investors. First, investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged.
A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership (or LLC) or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund. The entity must hold at least 90% of its assets in Qualified Opportunity Zones. The investor receives either stock or an interest in the fund. Funds may be created by an investor pool or by individual investors – the law currently provides no cap on the number of Opportunity Funds an investor may invest in.
There are a number of tax incentives of Qualified Opportunity Funds including (1) deferral of capital gains taxes from the sale of appreciated assets until the earlier of December 31, 2026 or the disposition of the Qualified Opportunity Fund, (2) increase in the basis of the appreciated assets used to buy the fund interest, thereby possibly lowering the capital gains tax up to 15%, (3) possible elimination of capital gains due on the appreciation in a Qualified Opportunity Fund if it is held for 10 years or longer.
At Lowenthal, we will work with you and your tax advisor(s) to identify qualified investments in Qualified Opportunity Zones and help you form the business entity that will serve as the Qualified Opportunity Fund. Contact us today for a free, confidential consultation. To learn more about Qualified Opportunity Funds, click here.