Qualified Opportunity Zones
In 2017, Congress enacted the Qualified Opportunity Zone program through the passage of the Tax Cuts and Jobs Act (Act). Its goal is to increase long-term investment in low-income and under-developed communities by giving investors preferential capital gains treatment for investments in Qualified Opportunity Zones (QOZs) (26 U.S.C. §§ 1400Z-1 and 1400Z-2).
QOZs were identified in all 50 states, the District of Columbia, and five US possessions. The list and a map of designated QOZs can be found here.
Under the QOZ program, investors that sell appreciated assets can defer paying capital gains tax by reinvesting the capital gains in a Qualified Opportunity Fund (QOF). Depending on the term of the investment in the QOF, and subject to a capital gains recognition event, an investor receives preferential treatment of capital gains, including:
1. Temporary tax deferral.
2. Step-up in basis.
3. Avoidance of additional capital gains taxes.
To date, the Treasury Department and the IRS have issued a number of proposed Treasury Regulations and guidance on requirements of the QOZ program. The proposed Regulations clarify many requirements of the program. The Treasury Department has requested comments on certain aspects of the Regulations and may issue additional Regulations in the future providing further clarification. For a detailed analysis of QOZ’s, see this article.