05 Jan Find Out Why Not All Opportunity Zones Are Created Equal
SMARTCAP has become a leading expert in the newly released ‘Opportunity Zone’ tax code created as part of the Tax Cuts and Jobs Act of 2017. We devoted significant staff time and brain power to help our investors understand the key rules and regulations around Opportunity Zones. If you are interested in learning more on how to analyze a deal feel free to reach out!
Should I consider investing in a Qualified Opportunity Zone (QOF)?
You should be highly selective when investing in a Qualified Opportunity Funds. Not all offerings are equal and it is critical to invest in a quality deal to start with. The tax treatment associated with a QOF should be considered a bonus, and not the sole reason for the investment. If the deal doesn’t work, no tax benefit will save it.
What type of gains are qualified for investment in order to receive the beneficial tax treatment?
Any capital gains qualify. This includes short term or long-term gains. Gains could be from the sale of a business, stock, real estate, cryptocurrency, art, commodities or any other investment that you have received a capital gain.
What is the time frame I have to invest my capital gains into a QOF?
This depends slightly on the investment. The easiest way to compute the time frame is to add 180 days from when you received the gain. You will receive the gain at different times based on the investment. For example, if you sold stock you owned directly, you would receive the gain that day; however, if you were part of a partnership that sold real estate or a business, you would not receive the gain until the end of the year; if the business was dissolved prior to the year end, you would not receive the gain till year end. If you have questions on when you would receive a gain form a sale, please reach out to us for informed answers.
How does tax deferral work on your original investment
You will still be responsible to pay tax on the original capital gain being deferred, either at the sale of the investment or on 12/31/2026, whichever comes first. After holding the investment for 5 years, your total tax due will be reduced by 10%, meaning you would only pay 90% of the original gain due if you sold the investment at that time. After holding the investment for 7 years, your total tax will be reduced by an additional 5%, meaning you will only pay 85% of the original gain due.
After 10 years of holding the investment, what tax is abated?
After 10 years of holding the investment, all capital appreciation on the new investment is tax free.
Can you invest funds that are not tied to a capital gain into the investment and receive the favorable tax treatment after 10 years?
No. You are able to invest funds not associated with capital gains; however, that investment will be considered a separate investment entity from a capital accounting view point. It will not be eligible for the favorable tax treatment described above.
How do I report to the IRS that I am investing into an opportunity zone fund and deferring my tax?
The IRS and Treasury Department are creating a form for self-reporting. At the time of writing this FAQ, the form has not been released. However, the IRS intent is for this reporting to be simple and easy to manage. We will be providing investors with the form along with guidance on how to file the form once it is released from the IRS. The fund operator is also required to report the fund as a Qualified Opportunity Zone Fund with the IRS.