Maryland was designated 149 Opportunity Zones!
Perhaps you’ve heard of a Federal tax incentive referred to as Qualified Opportunity Zones, or QOZ’s. QOZs have been a hot topic, and are touted as a tool for investors to pick up business properties at a great price, defer capital gains, and in return renovate and re-enervate some local communities. It’s certainly not as simple as that, but can, in fact, be a great tool for the right buyer.
The goal of the program is to encourage investment in low-income census tracts around the country. Opportunity Zones were created by the Federal Government as part of the 2017 Tax Reform. Investors with large amounts of potential capital gains built up on other assets (like appreciated stock or real estate) can sell off those assets and promptly reinvest the proceeds into business property in specified locations. In exchange for the new investment, they are able to defer those capital gains a number of years into the future. The replacement properties must fall in designated zones, and the properties must be ‘substantially improved’ after purchase.
There are 3 main tax incentives offered as part of the Opportunity Zone program:
- Temporary Tax Deferral – If the capital gains are reinvested in the QOF, the gains can be deferred until the QOZ property is sold, or 12/31/26 at latest.
- Step-Up in Basis – This one is complicated, but a great potential benefit. If the QOZ investment is held for at least 5 years, the original basis is stepped up by 10%. If it is held for more than 7 years, then the basis is stepped up 15%! That means more savings on the gain calculation when the asset is sold!
- Permanent Tax Exclusion – If the QOZ asset is held for more than 10 years, the portion of gain appreciated on the QOZ asset (not the original asset) is permanently excluded from tax!
BE CAREFUL! The timelines and restrictions are complicated.
An attorney and a CPA should be involved in every transaction. You could lose out on potential savings or trigger a large taxable gain by inadvertently missing some key details.
The QOZ property must be purchased within 180 days of triggering the capital gain of the original asset. You can use this QOZ Look up Tool provided by the US Treasury CDFI Fund to search for designated QOZs.
The qualifying properties must be ‘Substantially Improved’. Within 30 months after the purchase, you must improve the property by at least as much as the original basis. So you’re not talking about a fresh coat of paint; these qualifying projects will be major renovations or development, and will require substantial investment. Potential investors must be financially strong to be able to complete the sale and have funds available for the improvements. An Investor needs to set up a Qualified Opportunity Fund (QOF) specifically for the purpose of investing in QOZs. There are specific requirements for a QOF, and a CPA or attorney should be able to help the client ensure they create the funds properly.