Here are some of the key features of the Opportunity Zones provision of Tax Cuts and Jobs Act (TCJA). This article was written by Kislay (Sal) Shah. Mr. Shah has been in practice for over 25 years.
An Opportunity Zone (OZ) is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. To qualify as an OZ the community must be nominated by the state and certified by the Secretary of the United States Treasury. U.S. Treasury has delegated its certification authority to IRS. The purpose of OZ is to help economic development in distressed communities.
The Tax Cut and Jobs Act added opportunity zones to the tax code for the first time on December 22, 2017. Managers can create a Qualified Opportunity Fund (QOF) as a partnership or a corporation to invest in property in a qualified OZ.
Investors can elect to temporarily defer tax on capital gains that are invested in a QOF. The tax on the gain on sale can be deferred until:
- The earlier of the date of sale, or December 31, 2016;
- If QOF is held for longer than 5 years, there is a 10% permanent exclusion of the deferred gain;
- If QOF is held for longer than 7 years, there is a 15% permanent exclusion;
- If QOF is held for longer than 10 years, there is a 100% permanent exclusion.
OZ can be found in the Opportunity Zones Resources on the U.S. Treasury or IRB Notice 2018-48.
In order to obtain the tax deferral under this rule investments made that are sold in 2017 and onwards must be re-invested in QOF within 180 days of the sale. If only a partial reinvestment is made than capital gains deferral can only be made in the same proportion. Taxpayers are required to file IRS Form 8949 along with the Federal Tax Return.
You can get more detail on the topic discussed above from IRS website https://www.irs.gov.