One provision in the Tax Cuts and Jobs Act of 2017 that has garnered increasing attention from taxpayers and tax practitioners over the last few years pertains to the investment of capital gain income realized by taxpayers into qualified opportunity funds (“QOFs”). This provision, now codified in Internal Revenue Code (“Code”) Section 1400Z-2, incentivizes taxpayers to invest new capital into certain operating businesses and real estate projects located in designated U.S. census tracts certified as “opportunity zones.”
Investor Benefits.
Code Section 1400Z-2 and the related Treasury regulations provide three distinct tax benefits to investors:
First, taxpayers that timely invest capital gain income (including Code Section 1231 gains) into a QOF are able to defer taxes on the capital gain income invested into a QOF until December 31, 2026.
Second, taxpayers that timely invested capital gain income (including Code Section 1231 gains) into a QOF before December 31, 2021 were able to permanently exclude from taxation at least ten percent (10%) of the capital gain invested into a QOF. Discussions are ongoing in the U.S. Congress that could potentially extend this benefit to investments made after 2021.
Third, taxpayers that timely invest capital gain income (including Code Section 1231 gains) into a QOF are able to permanently exclude from taxation all gains realized from the future sale of such investments, including any related depreciation that would otherwise be subject to recapture (whether through a sale of interest in the QOF or a sale of assets by the QOF or its subsidiaries), provided that such sale does not occur within ten (10) years of the taxpayer’s investment in the applicable QOF.
Planning Opportunities.
While tax planning usually must be completed during the applicable calendar year, the timing rules for opportunity zone investments are more liberal and taxpayer-friendly. Many taxpayers that realized capital gain income (including Code Section 1231 gains) during 2022 are still eligible to make an investment in a QOF over the next several months and reduce their 2022 tax liability. In particular, many business owners and real estate owners that sold their business or property in 2022 are still eligible to make an investment in a QOF and reduce their 2022 tax liability.
The rules relating to opportunity zone investments can be complex and must be evaluated thoroughly to ensure they make sense from both a tax and business perspective. However, QOF investment opportunities are widely available, with thousands of opportunity zones located across the United States. Taxpayers also have the ability to form and organize their own “captive” QOFs through which to make these investments, or, if preferred, to invest in “open” or “public” QOFs that have been organized by fund sponsors.
For more information about investments relating to opportunity zones, please contact the individuals listed below.
Investor Benefits.
Code Section 1400Z-2 and the related Treasury regulations provide three distinct tax benefits to investors:
First, taxpayers that timely invest capital gain income (including Code Section 1231 gains) into a QOF are able to defer taxes on the capital gain income invested into a QOF until December 31, 2026.
Second, taxpayers that timely invested capital gain income (including Code Section 1231 gains) into a QOF before December 31, 2021 were able to permanently exclude from taxation at least ten percent (10%) of the capital gain invested into a QOF. Discussions are ongoing in the U.S. Congress that could potentially extend this benefit to investments made after 2021.
Third, taxpayers that timely invest capital gain income (including Code Section 1231 gains) into a QOF are able to permanently exclude from taxation all gains realized from the future sale of such investments, including any related depreciation that would otherwise be subject to recapture (whether through a sale of interest in the QOF or a sale of assets by the QOF or its subsidiaries), provided that such sale does not occur within ten (10) years of the taxpayer’s investment in the applicable QOF.
Planning Opportunities.
While tax planning usually must be completed during the applicable calendar year, the timing rules for opportunity zone investments are more liberal and taxpayer-friendly. Many taxpayers that realized capital gain income (including Code Section 1231 gains) during 2022 are still eligible to make an investment in a QOF over the next several months and reduce their 2022 tax liability. In particular, many business owners and real estate owners that sold their business or property in 2022 are still eligible to make an investment in a QOF and reduce their 2022 tax liability.
The rules relating to opportunity zone investments can be complex and must be evaluated thoroughly to ensure they make sense from both a tax and business perspective. However, QOF investment opportunities are widely available, with thousands of opportunity zones located across the United States. Taxpayers also have the ability to form and organize their own “captive” QOFs through which to make these investments, or, if preferred, to invest in “open” or “public” QOFs that have been organized by fund sponsors.
For more information about investments relating to opportunity zones, please contact the individuals listed below.
