Qualified Opportunity Zones (QOZs) were created by the Tax Cuts and Jobs Act of 2017 as a means to incentivize investment and economic development in designated low-income communities across the United States. Under this program, investors can defer and potentially reduce their capital gains taxes by investing in qualified projects in these zones. This blog post will provide an overview of the QOZ program and the benefits and considerations for developers looking to invest in these areas.
What are Opportunity Zones?
Opportunity Zones are designated census tracts that meet certain criteria for poverty rates and median family income. These zones were selected by each state governor and certified by the U.S. Department of Treasury in 2018. The goal of the program is to encourage investment in these underserved communities in order to stimulate economic growth and job creation.
Why and When were they Created?
Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017, which aimed to encourage private investment in economically disadvantaged areas. The program offers tax incentives to investors who invest in Qualified Opportunity Funds (QOFs), which are investment vehicles that are organized as corporations or partnerships to invest in businesses and properties within Opportunity Zones.
What Types of Developments can be in Opportunity Zones?
The types of developments that can be financed through QOFs include real estate development, infrastructure, and small business investments. Real estate developers can take advantage of the program by building or rehabilitating properties within the Opportunity Zones. Infrastructure development can include projects such as transportation and broadband internet, while small business investments can include startups and existing businesses.
What are the Tax Implications of Development in Opportunity Zones?
The QOZ program offers a range of tax benefits for investors who invest in Qualified Opportunity Funds. Investors can defer their capital gains taxes by reinvesting those gains in a QOF within 180 days of the sale of their original asset. If the investor holds their investment in the QOF for at least 5 years, they can reduce their capital gains tax by 10%. If they hold their investment for at least 7 years, they can reduce their capital gains tax by an additional 5%. If the investor holds their investment in the QOF for at least 10 years, they can completely eliminate capital gains taxes on the appreciation of the QOF investment.
How Long do Opportunity Zones Last?
The QOZ program is designed to encourage long-term investment in these underserved communities. To that end, the program is scheduled to last until 2026. However, investments made before the end of 2021 are eligible for the maximum tax benefits available under the program.
Conclusion
Qualified Opportunity Zones offer a promising opportunity for investors and developers to stimulate economic growth in underserved communities while enjoying significant tax benefits. The QOZ program incentivizes long-term investment in these areas, and developers can take advantage of the program by investing in real estate, infrastructure, and small businesses. The program offers tax deferral, reduction, and elimination of capital gains taxes, making it an attractive option for those looking to invest in these designated areas. As the program is scheduled to end in 2026, now is a good time to consider investing in Qualified Opportunity Funds and taking advantage of the tax benefits offered by the program.
Additional Articles to Read:
https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions
https://www.taxpolicycenter.org/briefing-book/what-are-opportunity-zones-and-how-do-they-work
https://www.jct.gov/publications/2019/qualified-opportunity-zones-an-overview/
https://www.novoco.com/resource-centers/opportunity-zone-resource-center/about-opportunity-zones