IRS Issues Guidance on Opportunity Zone Investments
The 2017 Tax Cuts and Jobs Act established qualified opportunity zones (QOZ) in each state to spur private investment in distressed communities. Under the new tax law, investors can receive capital gains tax breaks if they invest in these distressed areas. More than 8,000 communities across the country have already been designated by the Department of Treasury as a QOZ.
Investors who reinvest capital gains into a QOZ, directly or through a qualified Opportunity Fund (QOF), can defer paying taxes until the sale of the fund or until Dec. 31, 2026. The initial invested amount of capital gains subject to tax is reduced by 10% if the investment is held for 5 years and an additional 5% if the investment is held for 7 years. The gains earned by the QOF are exempt from capital gains tax if the investment is held in the fund for more than 10 years.
Last week, the IRS has issued long-awaited regulations describing the requirements for deferring gains by investing in a QOF under IRC Sec. 1400Z-2. The regulations clarify that only capital gains are eligible for deferral, the gain to be deferred must be gain that would be recognized by December 31, 2026, and the gain must not arise from a sale or exchange with a related person. Taxpayers may rely on the proposed regulations if the QOF applies the rules in their entirety and in a consistent manner.
Contact The Howe Law Firm if you have any questions about taking advantage of this generous tax strategy.