Jeff Winitsky, Mariel Giletto and Adam Chelminiak of our public finance and corporate departments explain the Qualified Opportunity Zone program born from the Tax Cuts and Jobs Act.
The Tax Cuts and Jobs Act created a new tax incentive program that allows taxpayers to defer, and in some cases, permanently exclude, taxable gains by redirecting those gains into investments in specific population census tracts in economically distressed communities designated as Qualified Opportunity Zones (QOZs). The Qualified Opportunity Zone program is designed to spur economic development in the QOZs by attracting private investment with tax incentives that build on and can be used together with, incentives provided under existing community-development programs such as New Market Tax Credits and Low Income Housing Tax Credits.
Under the Qualified Opportunity Zone program, any individual, corporation, or trust is able to defer recognition of gains (eligible gains) from the sale or exchange of property (including stock, partnership interests, personal property, and real estate) by re-investing the eligible gains in a “Qualified Opportunity Fund.” Qualified Opportunity Funds are investment vehicles formed as either a corporation or partnership for the purpose of investing in eligible property located in a QOZ.
In order to elect deferral of recognition of eligible gains, a taxpayer must roll over the eligible gains into a Qualified Opportunity Fund within 180 days of the date of the sale or exchange of the property creating the eligible gains. The taxpayer will then be able to defer recognition until the earlier of the disposition of its investment in the Qualified Opportunity Fund or December 31, 2026.
In addition to temporary deferral, permanent exclusion of a portion of the eligible gain is available under certain circumstances. Specifically:
- If a taxpayer holds its Qualified Opportunity Fund investment for at least five years, 10% of the rolled-over eligible gain is added to the taxpayer’s basis in its Qualified Opportunity Fund investment such that, on the earlier of the sale of the Qualified Opportunity Fund investment or December 31, 2026, 10% of the eligible gain is permanently excluded from taxable income.
- If a taxpayer holds its Qualified Opportunity Fund investment for at least seven years, 15% of the eligible gain is added to the taxpayer’s basis such that, on the earlier of the sale of the Qualified Opportunity Fund investment or December 31, 2026, 15% of the eligible gain is permanently excluded from taxable income.
- Finally, if a Qualified Opportunity Fund investment is held for ten years, (a) 15% of the eligible gain is added to the taxpayer’s basis such that, on the earlier of the sale of the Qualified Opportunity Fund investment or December 31, 2026, 15% of the eligible gain is permanently excluded from federal income taxation and (b) all appreciation on the value of the Qualified Opportunity Fund investment itself is excluded from taxable income.
As the program is just beginning, many of the details concerning the requirements and procedures of the Qualified Opportunity Zone program are still uncertain. However, the IRS has taken the first step in implementing the program by certifying and designating more than 4,800 QOZs across 20 states, including certain delineated areas in all 21 counties in New Jersey. Click here to see the census tracts in New Jersey that are designated and confirmed as QOZs by the United States Department of Treasury.
The next step in utilizing the benefits of the program will be the formation of Qualified Opportunity Funds themselves. While the IRS has indicated that taxpayers will self-certify their designation as Qualified Opportunity Funds by completing a form and attaching it to their federal income tax return, the certification form has not yet been released. We expect the form to be released in the late summer of 2018 and are monitoring the status of the same. Because the parameters of the program and Qualified Opportunity Funds are still uncertain, it is advisable that taxpayers who are interested in making Qualified Opportunity Zone investments delay selling assets that would create eligible gain until further guidance is available.
Parker McCay will continue to monitor guidance from the United States Department of Treasury and the IRS and provide updates on new developments. If you would like any additional information about how to take advantage of the tax incentives available under the Qualified Opportunity Zone program, please contact the attorneys in Parker McCay’s corporate department at any time.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.