The Qualified Opportunity Zone program was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) to provide for long-term, tax-advantaged investment into certain designated low-income census tracts.
Investments in Qualified Opportunity Zones (“QOZs”) have three main federal tax advantages:
- Temporary deferral of realized capital gains until December 31, 2026.
- A potential basis adjustment of up to 15% of initial deferred capital gain (currently not available for investments into Qualified Opportunity Funds after December 31, 2021).
- Permanent exclusion from taxation for any appreciation over and above the initial investment into the Qualified Opportunity Fund (QOF) for investments held for at least ten years.
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To take advantage of the deferral opportunity, cash equal to the deferred capital gain amount needs to be invested into a QOF within 180 days of the date of the transaction generating the gain. There are special rules for gains allocated to partners in partnerships or shareholders in S corporations.
There have been recent proposals in Congress that would alter the rules related to QOZ investments. If enacted, those proposals could lengthen the temporary deferral period and potentially reinstatement the basis adjustments available for investment into QOFs. Withum tax professionals are constantly monitoring the changing landscape around QOZs and are happy to discuss your specific situation.
States have had various responses to this new legislation. You should consult a tax advisor to determine whether the state in question has adopted the QOZ provisions.
Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.