The Federal Opportunity Zone Program – A New Program Worth Knowing!
You may have heard about the Opportunity Zone Program — included as a part of the Tax Cuts and Jobs Act of 2017. The Program was designed as a way to revitalize economically distressed communities by offering significant tax breaks to investors who invest in the development of these communities. Although there has been some debate over whether this program will succeed in actually revitalizing these communities, all politics aside, what does the Opportunity Zone Program mean for you as an investor?
This program allows for an investor to receive substantial tax breaks by investing their capital gains into a Qualified Opportunity Fund (QOF) whose funds are invested in government designated Opportunity Zones which are, typically, historically low-income communities. The greatest benefit that can be realized by the program will occur if an investor has held an investment in an opportunity zone for at least ten years. After this time, if the QOF sells an asset, the gain on the sale of the asset is entirely tax-free to the investor. For investments held for a lesser period of time, an investor is still allowed to defer and greatly reduce the taxes on any capital gains.
While the full requirements aren’t entirely clear yet, the Treasury Department has continued to roll out new guidance explaining how to get involved in the Program, the latest coming out on April 17th. This series of guidance has made several requirements clear:
- An Investor has 180 days after receiving a capital gain to invest it into a QOF.
- The QOF is an investment vehicle that must have either been formed for the purpose of investing in a qualified opportunity zone property or a pre-existing entity that has officially designated when it will begin operating as a QOF.
- A QOF must invest 90 percent of its assets in a qualified opportunity zone property. It is helpful to note there is a safe harbor provision discussed in the new guidance allowing cash to serve as a qualifying asset for up to 31 months if certain requirements are met.
- Investment in the QOF must be an equity interest rather than a debt interest
- Properties must be substantially improved during the time they have been invested in although what qualifies as “substantial improvement” is not entirely clear yet
For locals interested in the Opportunity Zone Program, large portions of the DMV area have already been designated as Opportunity Zones, notably much of Southeast and Northeast Washington, DC as well as much of the neighboring Maryland area and some portions of Northern Virginia. A map can be found at https://eig.org/opportunityzones. Contact Randy Alan Weiss for more information.