The Qualified Opportunity Zone Program has been around since 2017. It is a valuable tax planning strategy that is available to taxpayers even if they do not own a business.
The program provides tax benefits to long term investors in communities called Qualified Opportunity Zones. These are geographic areas that need improvement or development, such as inner cities and underdeveloped rural areas.
Individuals or entities that invest their capital gains in these communities through Qualified Opportunity Zone Funds may receive multiple tax benefits. These tax benefits include deferring or potentially eliminating capital gains taxes.
Purpose of the Opportunity Zone Program
The purpose of the program is to encourage real estate development, job creation and economic growth. Focused on specific high-need areas throughout the country, the intended impact of the program is to:
- Decrease poverty rates
- Decrease unemployment
- Increase home ownership
- Increase number of affordable housing units
- Increase median income
- Increase job availability
Qualified Opportunity Zone (“QOZ”)
A Qualified Opportunity Zone is an area selected by a state governor and certified by the U.S. Department of Treasury for inclusion in the Qualified Opportunity Zone Program. There are currently over 8,700 Qualified Opportunity Zones throughout the U.S.
Qualified Opportunity Zone Fund (“QOF”)
A Qualified Opportunity Zone Fund is a partnership or corporation that holds at least 90% of its assets in Qualified Opportunity Zone property. This includes commercial real estate, housing, infrastructure, new or existing businesses and designated Qualified Opportunity Zone Businesses.
Qualified Opportunity Zone Business (“QOZB”)
A Qualified Opportunity Zone Business is defined as a business in which at least 70% of its tangible assets qualify as Qualified Opportunity Zone property owned or located in a Qualified Opportunity Zone. At least 50% of the gross income earned by the business must be from the conduct of the business in a Qualified Opportunity Zone. No more than 5% of the assets of the QOZB can be “non-qualified financial property.”
How Does the Opportunity Zone Program Work?
The Opportunity Zone Program allows taxpayers to defer capital gains from a wide range of sources from current taxation.
Capital gains that are eligible for deferral may be either short-term or long-term gains. The gains may come from the sale of a wide variety of assets, including:
- Stocks, bonds, options, hedge funds
- Primary and secondary residences
- Businesses, machinery, commercial buildings
- Land, livestock, art, wine, automobiles
Opportunity Zone 180 Day Rule
To defer a capital gain, a taxpayer has 180 days from the date of the sale of the original property to invest the capital gain into a Qualified Opportunity Fund. The Fund then invests in Qualified Opportunity Zone property.
Opportunity Zone 10-Year Rule
In order to qualify for deferral of capital gain taxes, participants in the Program are required to reinvest their capital gains into a Qualified Opportunity Zone Fund.
In order to eliminate capital gains entirely, participants in the Program must hold their investment in the Fund for at least 10 years.
Opportunity Zone Tax Benefits
Currently, there are two significant tax benefits of the Qualified Opportunity Zone Program:
- Capital gains tax on the sale of these assets is deferred until the Qualified Opportunity Zone Fund investment is sold, or December 31, 2026, whichever occurs first.
- Taxpayers who hold their investment in the Qualified Opportunity Zone Fund for at least 10 years will pay no tax on the appreciation of their investment in the Fund.
There is no limit on the amount of capital gains that can be deferred in the Program.
Example of Opportunity Zone Tax Benefits
- In 2023, taxpayer invests capital gains from the sale of a prior investment into a Qualified Opportunity Zone Fund. Tax on the capital gain on the original assets is deferred.
- The investor pays tax on the original capital gain on the tax return that is due on April 15, 2027
- After 10 or more years has passed and the investment in the Fund is sold, the investor pays capital gains tax on the appreciation of his or her investment in the Fund.
Georgia and Opportunity Zones
The Georgia Department of Revenue conforms with IRS rules on the tax treatment of Qualified Opportunity Zone investments. (Some states, like California, do not conform with these rules, resulting in additional complexity in those states.)
The Georgia Department of Community Affairs has an interactive map on its website of opportunity zones in Georgia.
Potential Downside to the Opportunity Zone Program
A potential downside to the Opportunity Zone Program is the fact that the investment in the Fund is illiquid, due to the required 10 year holding period.
1031 Exchange vs Opportunity Zone
The Qualified Opportunity Zone Program is an excellent solution for individuals who failed to identify a replacement property within 45 days for a Section 1031 exchange. The Opportunity Zone Program allows up to 180 days to secure tax deferral, compared to 45 days for a 1031 exchange.
On the other hand, the 1031 exchange has its own advantages, compared to Opportunity Zones. For more detail, check out our article on the Section 1031 Exchange and Delaware Statutory Trust. We also have an article on the 1031 Qualified Intermediary, which may also be useful.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audit defense, sales tax, and small business accounting and bookkeeping.
You are welcome to call us in Atlanta at 678-235-5460 or in Chicago at 773-828-0551. You can also reach us by email at gary.massey@masseyandcompanyCPA.com.
We will be happy to help you with your tax matter. We deal with the IRS so you do not have to.
We want to be your CPA firm!
