Qualified Opportunity Zones: A Significant Capital Gain Deferral Tool

A new tax provision contained in the 2017 Tax Cuts and Jobs Act (TCJA) provides a significant opportunity to defer the tax on capital gain from the sale of stock and other assets. Taxpayers who take the gain proceeds and invest them in certain economically distressed communities, known as Qualified Opportunity (QO) Zones, can qualify.

Thousands of QO Zones exist throughout the U.S. and you do not need to live or work in one to qualify. Investments are made through a vehicle known as a Qualified Opportunity(QO) Fund, a partnership or corporation specifically organized for holding qualifying property located in a QO Zone.

While the IRS continues to develop regulations surrounding the new law, Taxpayers can anticipate the following capital gain deferral benefits for tax years 2018 through 2026:

  • If capital gains are reinvested in a QO Fund within 6 months of the original sale, the tax on those gains is not due until December 31, 2026 (or, if earlier, the date investment in the fund is sold).

  • If the investment is held for at least 5 years, 10% of the original gain is permanently exempted from tax.

  • If held for at least 7 years, an additional 5% of the gain is permanently exempt.

  • If held for 10 years or more, any appreciation in the value of the fund itself is also exempted from tax.

The QO fund can be organized by a third party, or taxpayers can form their own and manage its assets in accordance with IRS guidelines. Qualifying property includes QO Zone stock, QO Zone partnership interests, and QO Zone business property. Any investments received by the QO fund must generally be used to purchase new property or substantially improve existing property within a QO Zone.

QO Zones give taxpayers an exciting new planning opportunity for deferring capital gains and exempting tax on property appreciation. The IRS is expected to issue regulations within the next few weeks providing further details on the use of this new tax provision.

More details are available on the IRS Website.

The Doty Group is a full-service CPA firm offering Tax, Audit, Valuation, and Advisory Services to Business and Individuals in Tacoma, WA. If you have more questions regarding this or other Tax Reform matters, please give us a call at (253) 830-5450 or e-mail info@dotygroupcpas.com.