Tax reform legislation enacted in 2017 created the opportunity for significant new capital gains tax benefits for investors in qualified opportunity funds (QOFs). The primary purpose of the law is to create economic development as well as job creation in economically distressed communities. The Treasury, in coordination with State Governors, certified nearly 9,000 census tracts as QOZs. There are two enumerated QOZs right here in Manassas and several more throughout Fauquier & Prince William County. See Designated Qualified Opportunity Zone map here.
Significant capital gains tax benefits for investors
A QOF is an investment vehicle that invests in real estate or other businesses located in certain areas that have been designated as qualified opportunity zones (QOZs). This legislation provides the ability for investors with existing capital gains tax liability, to reduce the amount of those tax obligations by up to 15%, and more significantly, allowing the reinvestment of those funds to accrue tax free; provided, that, they are invested in a QOZ and held for at least 10 years. Clearly, this is a tremendous tax advantage for investors that are interested in making a real estate or business investment in a QOZ.
No restriction on the source of those capital gains
Another added benefit is that there is no restriction on the source of those capital gains in order to take advantage of this new legislation. While QOZ investment options are limited to real estate or businesses in QOZs, the source of funds can come from a wide range of investments giving rise to capital gains tax.
Additional guidance released in May 2019
Although when it was first enacted, there were many unanswered open issues with respect to the legislation, the United States Department of the Treasury (Treasury), has issued proposed regulations and additional guidance related to QOFs on May 1, 2019, which updated the original regulations and guidance from October 19, 2018. Updates included clarification on topics such as:
- Investing Capital gains into a QOF
- Structuring Issues related to investment into a QOF
- Investing by the QOF into a QOZ property
- Operating within the qualified opportunity zone
- Exiting the QOF
Our experienced team of attorneys are able to assist you with your QOF investment questions, clarification on the recent legislative updates, and prospective transactions in order to take advantage of this unique opportunity.
Authored by: Markus Ebert