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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.
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 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 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
Tax on Original Capital Gain
Compounded Hypothetical Annual Return
OZ Investment Amount Prior to Deferred Tax Liability
Taxed Paid in 2027
on Original Capital Gain
Remaining OZ Investment Net of Taxes Paid
over 10 years
Tax on Appreciation
over 10 years
over 10 years
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?
QOZ regulations provide that taxpayers eligible to elect gain deferral include:
- C Corporations (including regulated investment companies (RICs) and real estate investment trusts (REITs)
- 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:
- 180-days starting with the date the asset is sold;
- 180-days beginning on the last day of the partnership’s taxable year (December 31st for a calendar year partnership;
- 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.