The Tax Cuts and Jobs Act created a new tax item for American taxpayers – qualified opportunity zones (QOZ). Qualified opportunity zones are a way to inspire investment in certain U.S. communities and reward investors for keeping their investments in these communities for long periods of time. If you want this new tax benefit, or want your business to benefit from these investments, here’s what you should know.
What are qualified opportunity zones?
QOZs are areas that have been identified as ‘economically-distressed communities’. The zones are meant to inspire economic development and job creation. Opportunity zones hold this designation for 10 years and are set to expire on Dec. 31, 2027. Investors who make investments in these zones may receive tax benefits.
I’m interested. What do I have to do to invest?
Technically, you invest in a Qualified Opportunity Fund (QOF), not the zone itself. QOFs are investment vehicles organized as corporations or partnerships to invest in opportunity zones. You can become a QOF by filing Form 8996 annually with your federal income tax return. Limited liability companies (LLCs) can be a QOF if treated as a corporation or partnership and organized to invest in QOZ property.
Anyone can invest in an opportunity fund. You aren’t required to live, work, or have a business in a QOZ. To maximize your tax benefit, you must:
- Invest a capital gain in an opportunity fund and choose to defer that gain for income tax purposes.
- Make your investment within 180 days from when you’d recognize a capital gain.
Keep in mind, the IRS extended the 180-day limit because of the coronavirus pandemic. IRS guidance says if you sold property for an eligible gain and had 180 days to invest in a QOF to defer that gain, and the 180th day to invest falls between April 1, 2020, and Dec. 31, 2020, you have until Dec. 31, 2020, to invest the gain into a QOF. View IRS Notice 2020-39 or the summary for more information.
What are the tax benefits?
The benefit of investing in a qualified opportunity fund is that you can defer tax on your capital gains. Almost all of your gains will qualify for tax deferral. If the fund is a partnership, you can defer tax at the partnership or partner level. Similar rules also apply for funds that are corporations. The capital gains you initially defer will be picked up when you sell your new investment, or on Dec. 31, 2026, whichever occurs first.
If you hold the investment for more than five years, 10% of the deferred gains are excluded from the tax deferral. If you hold this investment for more than seven years, the percentage increases to 15%.
If you hold your investment for at least 10 years, you can adjust the basis of your investment to its fair market value on the date you sell or exchange the investment. You have until Dec. 31, 2047, to reach your 10-year holding period and recognize this tax benefit.
Where are opportunity zones in West Michigan?
There are about 10 opportunity zones in the Grand Rapids area. Most of them are located south of where US-131 and I-196 intersect. In the greater West Michigan area, there are two zones in Holland, one in Hastings, one in Ionia, and two in Muskegon.
If you’d like to view all opportunity zones – in Michigan or nationwide – here’s a list of all QOZs organized by state. There’s also a map. Instructions on how to use the map and find opportunity zones are also located here.
Investing in a QOF isn’t just a new tax opportunity, it’s also an investment opportunity for you and the community. If you’d like to invest in a qualified opportunity fund, connect with your advisors to help you find funds, understand the pros and cons, and investment requirements.
Originally published 1/9/2019. Updated 8/4/2020.
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