Qualified Opportunity Funds

As a part of the Tax Cuts and Jobs Act, Congress has created a new program to encourage investment in disadvantaged communities across the country called the Opportunity Zone Program. According to the Economic Innovation Group, U.S. Investors currently hold an estimated $2.3 trillion in unrealized capital gains, representing a significant resource for economic development.

The goal of the program is to have a portion of these gains invested in Qualified Opportunity Funds which will be U.S. Treasury Department certified funds that make equity investments in businesses, real estate, and business assets located in a Qualified Opportunity Zone.  Governors in all states have identified eligible low-income census tracts to become Opportunity Zones.  These census tracts have poverty rates of at least 20% or median family incomes no greater than 80% of the surrounding area.

The Opportunity Zone Program provides favorable tax treatment for investors with capital gain tax liabilities who invest those gains in these Opportunity Funds.  Benefits increase the longer the Opportunity Fund is held, with the most benefit going to those who hold their investment for at least 10 years.

The Opportunity Zones offer three important tax incentives for investing in low-income communities:

  • One of the advantages to investors is that the Qualified Opportunity Zones will retain this designation for 10 years.  This allows investors to temporarily defer tax on any capital gains as long as the gain is reinvested in a Qualified Opportunity Fund.  The deferred gain will be recognized either when the opportunity zone investment is disposed of or December 31, 2026, whichever comes first.
  • The investor will also receive a step up in basis for the capital gains reinvested in an Opportunity Fund. If the investment is held for at least 5 years, the basis is increased by 10% of the deferred gain, while if it’s held for at least 7 years, the basis is increased by an additional 5%.  This could potentially exclude up to 15% of the original gain from being taxed.
  • The program also incentivizes the investor to hold the investment in the Opportunity Funds for at least 10 years.  In this case, there is a permanent exclusion of capital gains tax on the appreciation in the Qualified Opportunity Fund.  This exclusion is only for those gains accrued after an investment in an Opportunity Fund.

The U.S. Department of the Treasury and the Internal Revenue Service Center plan to release additional information on the specifics of this program, which we will relay to you as updates take place.

If you have any questions, please contact us.