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. Generally, individual and corporate taxpayers are allowed to defer payment of taxes on gains from the sale of stock, business assets, or any other property by investing the proceeds into an Qualified Opportunity Fund, which in turn must invest at least 90% of its assets, directly or indirectly, in businesses located in Opportunity Zones. Partial forgiveness of tax on deferred gains and on future appreciation is possible for Qualified Opportunity Fund investments held for five, seven, and 10 years. 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 Qualified 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.
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. 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.
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, certify your Qualified Opportunity Fund, help you form the business entity that will serve as the Opportunity Fund, and guide you as to making your investment in a Qualified Opportunity Zone.