The Tax Cuts and Jobs Act—Qualified Opportunity Zones
In his Real Estate Securities column, Peter M. Fass writes: The qualified opportunity zone can provide significant tax savings to taxpayers selling appreciated property, including both real property and other asset classes, as well as provide investment capital to spur economic development in distressed areas.
October 02, 2018 at 02:45 PM
9 minute read
The Tax Cuts and Jobs Act, P.L. 115-97 (Dec. 22, 2017) (Tax Act), created a new economic development vehicle with tax deferral and tax abatement (“qualified opportunity zones or QOZ”). QOZ provides a deferral mechanism for short- and long-term capital gains for current investments in nearly all asset classes. A QOZ provides (1) the ability to invest only the gain rather than the principal of a current investment; (2) a broad range of investments eligible for the deferral; (3) a potential basis step-up of 15 percent or substantially more of the initial deferred amount of investment; and (4) an opportunity to eliminate taxation on capital gains post-investment.
A QOZ generally must be a population census tract within a state that qualifies as a low income community as defined under Section 45D(e) of the Internal Revenue Code (Code). To qualify as a low income community (LIC), a population census tract must have a poverty rate of no less than 20 percent, or a median family income not to exceed 80 percent of either the statewide or metropolitan area income, depending on the tract's location. A tract that is not an LIC but is contiguous to an LIC that is designated as a QOZ (even if not in the same state) and has a median family income not exceeding 125 percent of the median family income of such LIC may also be designated as a QOZ. The total number of non-LIC tracts that are designated as QOZs in a state cannot exceed five percent of the total number of designated QOZs in such state.
Requirements to be a QOZ. A QOZ business is any trade or business that meets the following requirements:
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