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Qualified Opportunity Zones

What are Opportunity Zones?

What are Opportunity Zones?

An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Opportunity Zones are designed to spur economic development and job creation in these communities by providing tax benefits to investors.

Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The Opportunity Zones program provides a tax incentive for investors to re-invest their realized capital gains into Opportunity Funds that are dedicated to investing into Opportunity Zones designated by the chief executives of every U.S. state and territory.

The U.S. Treasury, in collaboration with State and Local governments, has certified 8,762 communities in all 50 states, the District of Columbia, five U.S. territories and Puerto Rico as Opportunity Zones.

What Qualifies as an Opportunity Zone?

What Qualifies as an Opportunity Zone?

To qualify as an Opportunity Zone, a census tract must have a poverty rate of 20% or higher or a median household income that is less than 80% of the surrounding area. The law generally allows for 25% of a state’s low-income community population census tracts to be designated as qualified opportunity zones. Governors are responsible for identifying the areas in their states to be designated as opportunity zones. The same definition of a “low-income community” that is used by the new markets tax credit (NMTC) as the basis for defining an Opportunity Zone.

source: https://eig.org/opportunity-zones-map-comes-focus/

What are the tax benefits?

What are the tax benefits?

Potential tax benefits associated with the QOZ Program fall into two main categories:

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.

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 of such QOF Investment, regardless of the size of the potential profit.2 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 Opportunity Zone provisions.

Important Deadlines

Important Deadlines

Generally, to receive the QOF Program tax benefits, eligible capital gains must be reinvested in a QOF within 180 days from the sale of an asset. However, the QOZ Program 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, 2023, have until September 11, 2024 to complete an investment in a QOF that is eligible for QOZ Program tax benefits due to the three options allowed for calculating their 180 day window:

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

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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.  

This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. 

Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Certain QOZ areas may not be able to appreciate as predictably as more established areas. Some neighborhoods may be more accommodating to development than others, impacting the success of the investment. Development and redevelopment of real estate traditionally have more risk than other types of real estate strategies. The availability and cost of construction and development financing is uncertain and represents a risk inherent in the execution of a QOF strategy. The rules and regulations of the QOZ Program are complex, compliance with the QOZ Program comes with significant challenges. QOFs tend to be illiquid investments for ten or more years.

Any discussion regarding “Qualified Opportunity Zones” — including the viability of recycling proceeds from a sale or buyout — is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidance’s, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist, and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Insurance offered through Concorde Insurance Agency, Inc. (CIA). Bravest Wealth Management is independent of CIS, CAM, and CIA.