New section 1400Z established by the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) has established opportunity zones for investing. New section 1400Z allows any taxpayer to defer paying tax on capital gains from the sale of property if those gains are timely invested in a Qualified Opportunity Fund (QOF) which, in turn, must invest 90 percent of its assets in businesses located or property used in a low income community. Following is a summary of how the benefits of an opportunity zone can be realized.
Period for investment: Before the end of the 180-day period beginning on the date of sale.
Election: Made at the time of the investment.
Period of deferral: The period of capital gain tax deferral ends upon the earlier of the date the QOF investment is sold or exchanged or Dec. 31, 2026.
Amount recognized: The lesser of amount of gain deferred or the fair market value of the investment minus the taxpayer’s basis in the QOF. The taxpayer’s basis in the QOF is initially deemed to be zero.
Partial forgiveness: For investments held at least five years, the basis is increased by 10 percent of the deferred gain resulting in only 90 percent of the gain being taxed. For investments held at least seven years, the basis is increased by 15 percent of the deferred gain resulting in only 85 percent of the gain being taxed.
Elimination of additional gains: For investments held longer than 10 years, the basis is equal to the fair market value on the date that the investment had been sold resulting in elimination of gains on appreciation of the investment from the time it was sold.
Qualified opportunity zones (QOZ): QOZs are in the process of being determined currently. Potential QOZs have been submitted by each state and are being reviewed by Treasury. As more QOZs are approved, the list will be updated. QOZs in 18 states have been designated. The current list of QOZs can be found here.
The bottom line is that if the investment is made and held for 10 years or more, 15 percent of the original gain and any appreciation from the beginning will not be taxed, but 85 percent of the original gain will be taxed on Dec. 31, 2026, whether sold or not.