The Opportunity Zone Program offers significant tax benefits to a wide range of investors. Established under the U.S. Tax Cut and Jobs Act of 2017, the tax-incentive program aims to encourage investors to direct capital into new projects in certain low-income rural and urban communities in exchange for federal capital gains tax advantages.
Opportunity Zones must be located in certain designated low-income census tracts which either have poverty rates of at least 20 percent or median family incomes no greater than 80 percent of the surrounding area’s according to the 2011-2015 American Community Survey. In New Jersey, 169 census tracts in 75 municipalities have been designated as Opportunity Zones.
Any federal taxpayer, including individuals, businesses, and corporations, can invest in a Qualified Opportunity Fund (QOF). The key requirement is that the investments must consist of capital gains reinvested during the 180-day period beginning on the date of the sale or exchange giving rise to the gain.
Qualifying for the Opportunity Zone Program
Investment vehicles that provide funds to Qualified Opportunity Funds must meet certain criteria. In addition to being certified by the U.S. Treasury Department, an investment vehicle must be an entity such as a corporation or partnership which was formed for the purpose of investing business property, stock or partnership interests in Qualified Opportunity Zones. In order for a trade or business to qualify as an investment vehicle, substantially all of the tangible property owned or leased by the taxpayer of the trade or business must qualify as Qualified Opportunity Zone Property.
Qualified Opportunity Funds must also hold at least 90 percent of their assets in Qualified Opportunity Zone Property. “Qualified Opportunity Zone Property” is defined as tangible property used in a trade or business of a Qualified Opportunity Fund and located in a qualified opportunity zone, provided that: (1) the property was acquired after December 31, 2017; (2) the original use of the property Qualified Opportunity Zone commenced with the Qualified Opportunity Fund; (3) the Qualified Opportunity Fund substantially improves the property; and (4) the property was used mostly in a Qualified Opportunity Zone during the majority of the holding period for the property.
When submitting an application to become a Qualified Opportunity Fund, a taxpayer must complete Form 8996 and attach to the taxpayer’s federal income tax return for the taxable year. An applicant does not require prior approval from the IRS in order to apply for the program. Nonetheless, it may be prudent for an applicant to obtain an opinion letter from an attorney and/or an accountant opining that the project complies with the program.
Reaping the Tax Benefits
The Opportunity Zone Program provides three distinct tax benefits with respect to capital gains. These benefits include:
- Taxation on capital gains from original funds that have been reinvested is deferred until December 31, 2026, unless the funds are withdrawn from a Qualified Opportunity Fund prior to that date.
- Capital gains reinvested in Qualified Opportunity Fund investments receive a reduction in capital gains tax liability by 10 percent at the 5-year mark and by an additional 5 percent at the 7-year mark.
- Gains from Qualified Opportunity Fund investments held for at least 10 years are permanently excluded from the capital gains tax.
Meeting the Program’s Timelines
In order to take full advantage of the potential tax benefits offered by the Opportunity Fund Program, gains received from the sale of assets must be invested into a Qualified Opportunity Fund is December 31, 2019. Because the tax benefits are time-sensitive, individuals and businesses who are interested in the Opportunity Zone must act quickly, as the potential tax benefits that can be received by the program are time-sensitive. Candidates of the program must demonstrate a commitment to working together with municipalities and other contracting parties to complete projects successfully and timely.
Withdrawal of funds from the projects, or part of the projects, must also be evaluated and discussed with investors. As mentioned above, December 31, 2026 is the last date the original capital gains can be deferred from taxation. Notably, this deadline does not adjust the date when the additional capital gains from investing in a Qualified Opportunity Fund will be taxed. For instance, an investor that reinvests capital gains in a Qualified Opportunity Fund in 2019 would be required to pay federal taxes on the original gains by December 31, 2026. Once the gains timely are paid on the tax, the investor can sell the property free from liability for any tax on the additional gains from the Qualified Opportunity Fund investment.
Working with Experienced Advisors
While the Treasury and IRS have issued draft regulations, many unanswered questions still remain, such as clarifying how refinancing or repayment of lending is affected by the Opportunity Zone Program. Consideration will also need to be made to decipher how the program interacts with other federal and state programs that focus on specific social benefits.
Given the continually evolving regulatory landscape, structuring investment vehicles to qualify for the Opportunity Zone Program successfully requires an experienced legal and accounting team, each which is up to date on the growing field of regulations and can help you navigate them successfully. With a multi-disciplinary team of affordable housing, real estate, tax and corporate attorneys, Scarinci Hollenbeck is uniquely qualified to assist New Jersey investors navigate the new program and realize its benefits. To discuss potential opportunities for your business, we encourage you to
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact Jeff Cassin, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.,