Qualified Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017 in an effort to encourage investment in distressed areas. Investors receive tax benefits in exchange for investing eligible capital into these communities. It enables taxpayers to defer tax on eligible capital gains by making investments in a Qualified Opportunity Fund and meeting other requirements.
To encourage a timely investment into an activity, the rules and regulations of Opportunity Zones require the cash to be invested within a required period of time.
- Capital gains taxes that were initially deferred can be deferred until December 31, 2026 or when the Opportunity Zone investment is sold, if earlier.
- If the Opportunity Zone investment is held for 5 years, 10% of the initial gain will not be subject to federal income tax.
- If the investment is held for at least 10 years, any gains above the initial investment will not be subject to taxation.
Federal Disaster Area Extensions
If the Opportunity Zone is within a Federal Disaster Area, two of these deadlines are extended:
- Under normal working capital safe harbor rules, a business has 31 months to acquire, construct, or rehabilitate tangible property. The Final Treasury Regulation Section 1.1400Z2(d)-1(d)(3)(v)(D) provides that an additional 24 months can be added to the original 31-month period as long as the business otherwise meets the safe harbor requirements.
- 90% of the assets of an Opportunity Fund must be held in Qualified Opportunity Zone property. Cash the fund receives from the Opportunity Zone business or sale of property must be reinvested into a Qualified Opportunity Zone property within 12 months or be counted against the 90% limit. However, if the reinvestment is delayed due to a federal disaster, the fund has an additional 12 months before the cash counts against the 90% limit. The proceeds must be invested as originally intended.
The federal disaster designation does not, however, extend the amount of time between the initial sale generating the capital gain and investing the gains in an Opportunity Zone. An investor can invest the gains into a Qualified Opportunity Fund, following the proper requirements, and use the additional time the fund has in making an investment.
Most, if not all, of the country has been declared a Federal Disaster Area due to COVID-19. With the additional flexibility, investors can make more informed choices on how and when to spend Opportunity Zone Funds. For questions, please reach out to your MarksNelson advisor or call (816) 743-7700.