New investment opportunities pop up all the time – in the form of a start-up business, advice from a financial advisor, a new government-sponsored program, or something else entirely. Among the buzziest in recent memory, particularly here in the Greater Madison Area, are Qualified Opportunity Zones (QOZs).QOZs are located in low-income census tracts that have been designated as areas that desire economic development. The idea is to spur an influx of cash from private investments into the specified areas to develop the real estate and, in turn, provide capital gains tax-incentive benefits to investors for an extended period of time. This Opportunity Zone Program was part of the Investing in Opportunity Act, which was passed as part of the Tax Cuts and Jobs Act.
Below is a map of QOZs that have been identified in and around Madison. For context, there are more than 8,700 throughout the United States, and its territories. (Full list here.)
How It Works
An investor who has a capital gain from the sale of personal, business, or investment property invests into a Qualified Opportunity Fund (QOF) within 180 days of the transaction. The QOF is a U.S. partnership or corporation that has the intention of investing 90% of its holdings into a QOZ (or multiple QOZs).
In turn, the Investor's tax benefit is being able to defer the reinvested capital gain until the earlier of two options:
- They sell their QOF investment; or
- December 31, 2026
In addition, if the Investor opts to leave the original deferred capital gain in the QOF, after five years, the gain is reduced by 10%; after seven years, it's reduced by an additional 5%.
If the Investor opts to hold the QOF investment for 10 years, there is no taxable gain on the sale of the QOF investment, as the tax basis in the QOF investment is equal to the fair market value as of the date of sale; a taxable loss can still be recognized.
To receive the maximum benefits from this program, an Investor would need to invest in a QOF by December 31, 2019.
A QOF can invest in QOZ stock/partnership interest or QOZ business property, including leased property, real estate updates, debt-financed distributions, and adjacent property to a QOZ; and each has its own rules that determine if it qualifies. This article by Wipfli details both QOZ regulations and updates thereto.
This program is not operating through the tax program, but rather governed through two Internal Revenue Code sections. The QOF is a new product, with new IRS rules that change how capital gains are treated. QOFs are self-certified, which means no approval from the U.S. Treasury Department is necessary, and are 100% managed in the private market. There are no limitations on the number of QOFs there can be, and no cap on the amount that can be invested.
If you are interested in hearing more about how your investment can spur economic development in your community, and receive tax benefits at the same time, please get in touch and let's start the conversation