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Qualified Opportunity Zone Program

Tax incentives encouraging long-term capital investment in lower-income communities across the U.S.

Offering Tax Benefits to Investors Through Qualified Opportunity Funds

Created by the Tax Cuts and Jobs Act of 2017, the Qualified Opportunity Zone Program is a tax-incentive program designed to encourage long-term private sector investments in designated communities known as qualified opportunity zones.

Individuals and entities may invest short- or long-term capital gains generated from a wide range of assets into qualified opportunity funds. The potential tax incentives include the deferral of taxes owed, pass-through depreciation, and ultimately the elimination of future capital gains tax on any appreciation of the investment as well as the elimination of any depreciation recapture expense.

Seasoned Partners in QOZ Development

Our joint venture with Silverstein Properties leverages real estate, capital markets, and development capabilities expertise to target opportunity zone investments.

Silverstein Properties is a privately held, full-service real estate development, investment, and management firm. Founded in 1957 by Chairman Larry Silverstein, Silverstein Properties has developed, owned, and managed more than 40 million square feet of office, residential, hotel, retail and mixed-use properties.

Best known for the redevelopment of the World Trade Center, the firm focuses on large-scale, complex development projects that enhance neighborhoods and communities.

Qualified Opportunity Zones (“QOZs”)

A QOZ is a designated census tract in the United States that has been selected by a state governor and certified by the U.S. Department of Treasury for inclusion in the QOZ Program.

To qualify, a census tract must pass a low-income community test based on the most recent census information from 2010. Each state governor can nominate up to 25% of the state’s qualifying census tracts for inclusion in the QOZ Program.

There are 8,700 QOZs spread across all 50 states, D.C., and several U.S. territories.

Qualified Opportunity Funds (“QOFs”)

A QOF is an investment vehicle organized as either a partnership or a corporation holding at least 90% of its assets in QOZ property.

QOFs can invest in a wide variety of businesses, including commercial real estate, housing, infrastructure, and start-up businesses. QOFs can hold single or multiple assets.

Potential Tax Benefits

Deferral

If a taxpayer invests the capital gain from the sale of any property into a QOF within 180 days of recognizing the gain, taxes on such proceeds may be deferred until the earlier of December 31, 20261 or the disposition of the QOF interest. Gains passed through on a K-1 tax form have additional timing flexibility.

Elimination

Investors who hold their investment for at least ten years receive a step-up in basis which means they pay no tax on the appreciation of their QOF investment upon disposition (so long as such disposition occurs prior to January 1, 2048), regardless of the size of the potential profit2. In addition, the step-up in basis eliminates any depreciation recapture tax that would otherwise be owed upon sale.

All investments involve risk, and the realization of the benefits is dependent on proper structuring and the structure and performance of the future investments selected. Not all investments will provide all of these benefits.

1 A 10% step-up in basis was available for investments made prior to December 31, 2021 and an additional 5% step-up in basis was available for investments made prior to December 31, 2019.

2 Assumes that the investor is a resident of a state that conforms with the federal QOZ Program provisions.

An Opportunity for Increased After Tax Return Potential

Scenario: Hypothetical After-Tax Value1, 2, 3

Two investors each sell an asset that generates a $1,000,000 long-term gain.

Investor A

Investor A pays capital gains taxes and invests the remaining capital in a product that generates a 10% compounded annual return over ten years and then liquidates the investment.

Investor B

Investor B invests the gain in a Qualified Opportunity Fund, which generates the same return over the same time period.

Both investors are residents of a state that conforms with the QOZ Program and are subject to the top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, the net investment income tax of 3.8%, and a state tax of 6.2%, for a total tax liability of 30%.

Non-Qualified Opportunity Fund Qualified Opportunity Fund
Original Capital Gain from sale of prior investment $1,000,000 $1,000,000
Tax Rate 30% 30%
Tax on Original Capital Gain ($300,000) Deferred
Investable Amount after tax $700,000 $1,000,000
Compounded Hypothetical Annual Return 10% 10%
OZ Investment Amount Prior to Deferred Tax Liability n/a $1,331,000
Taxed Paid in 2027 on Original Capital Gain n/a (300,000)
Remaining OZ Investment Net of Taxes Paid n/a $1,031,000
Appreciation over 10 years 1,115,620 1,309,127
Tax on Appreciation over 10 years (334,686) Eliminated
Final Value over 10 years 1,480,934 2,009,127

1 This illustration assumes that the investor invests on January 1, 2024, and is subject to the top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, the net investment income tax of 3.8% and a state tax of 6.2% for a total tax liability of 30%. No brokerage or investment advisory fees are accounted for with respect to either example.

2 This assumes that the QOF investor is a resident of a state that conforms with the QOZ Program.

3 Assumes that the investor has no capital losses to reduce such capital gain and refers to the inclusion of the original, invested capital gains in such investor’s taxable income on December 31, 2026.

Frequently Asked Questions

Where are QOZs located and how many are there?

There are over 8,700 QOZs spread across all 50 states, D.C., and several U.S. territories. There are rural, suburban, and urban QOZs. According to ESRI1, 18.2% of the U.S. total land area is in a QOZ and 5.4% of major metro land area.

1 ESRI, 2018

What proceeds are eligible for QOZ tax benefits?

A capital gain is eligible for deferral if it is from the sale or exchange of property with an unrelated party (not more than 20 percent common ownership) and the gain is treated as a capital gain (short-term or long-term) for federal income tax purposes. In order to qualify for QOZ tax treatment, such gain must be invested into a QOF within 180 days of recognizing the gain.

Gains from a wide range of investment assets are eligible, including gains from:

  • Stocks, bonds, options, hedge funds
  • Primary and secondary residences
  • Businesses, machinery, commercial buildings, rental properties
  • Land, livestock, art, wine, automobiles

What is an eligible taxpayer?

“ELIGIBLE” TAXPAYER

QOZ regulations provide that taxpayers eligible to elect gain deferral include:

  • Individuals
  • C Corporations (including regulated investment companies (RICs) and real estate investment trusts (REITs)
  • Partnerships
  • Certain other pass-through entities

The first day of the 180-day period to reinvest gains into a QOF generally is the date on which the gain would be recognized for federal income tax purposes.

Is there additional flexibility in the timeline for QOF investment of K-1 partnership gains?

Yes, the final regulations provide additional flexibility for K-1 partnership gains resulting in additional planning options for financial advisors. For example, assuming a calendar-year partnership, K-1 partnership gains realized on or after January 1, 2022 have until September 11, 2023 to complete an investment in a QOF that is eligible for QOZ Program tax benefits because of the third of the three options allowed for calculating their 180-day window:

  1. 180-days starting with the date the asset is sold;
  2. 180-days beginning on the last day of the partnership’s taxable year (December 31st for a calendar year partnership;
  3. 180-days starting on the date the partnership’s tax return is due, without any extension (March 15th for a calendar year partnership).

Do QOZ tax benefits apply to states as well?

While residents of all U.S. states are eligible to receive federal tax incentives related to QOZ legislation, individual states have full discretion regarding whether or not to offer any benefits related to state taxes. Therefore, state tax treatment related to QOF investment differs from state to state.

What are the most important deadlines and/or timelines for QOF investment?

Key dates and timelines for investors are as follows:

  • 180 Days: Generally, a taxpayer has 180 days from recognizing a capital gain to invest in a QOF to qualify for tax incentives. Additional flexibility is available for individuals with K-1 partnership gains
  • 10 years: The investor must hold the interest in the QOF for at least 10 years to qualify for elimination of taxation on gains related to appreciation of the investment
  • Dec 31, 2026: End of the legislated deferral period (taxes on deferred gains must be paid no later than tax year 2026)
  • Dec 31, 2047: End of the capital gain exclusion period

Are gains from life insurance and annuities eligible for QOZ tax treatment?

No. Because gains from life insurance and annuities are taxed at normal income tax rates (not at the capital gains tax rate), they are not eligible for QOZ tax treatment.

Important Disclosures

The information contained herein is not an offer to sell or a solicitation of an offer to buy any securities and is for training and educational purposes only. Such an offer or solicitation can be made only through a confidential private placement memorandum relating to an offering.
Cantor Fitzgerald and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting professionals before engaging in any transaction.

 

QOZ Program Risk Factors to Consider

Investors in QOFs will need to hold their investments for certain time periods in order to receive the full QOZ Program tax benefits. A failure to do so may result in the potential tax benefits to the investor being reduced or eliminated.

If a fund fails to meet any of the qualification requirements to be considered a QOF, the anticipated QOZ Program tax benefits may be reduced or eliminated. Furthermore, a fund may fail to qualify as a QOF for non-tax reasons beyond its control, such as financing issues, zoning issues, disputes with co-investors, etc.
Distributions to investors in a QOF may result in a taxable gain to such investors.

The tax treatment of distributions to holders of interests in a QOF are uncertain, including whether distributions impact the aforementioned QOZ Program tax benefits.

A QOF must make investments in QOZs, which carries the inherent risk associated with investing in economically depressed areas.

Any additional legislation or administrative guidance may reduce or eliminate the expected potential QOZ tax benefits or increase the burden of compliance with the QOZ Program.

Investors in a QOF may not be able to take advantage of the QOZ Program’s tax benefits if they do not properly make a deferral election on IRS Form 8949.

QOF may encounter significant opposition from local communities, political groups, or unions, which may damage their goodwill and reputation and adversely affect operations.

An investment in a QOF is likely to be speculative, illiquid, and involves a high degree of risk. This is no guarantee that investors will receive any return.