Qualified Opportunity Zones – Tax Benefits for Real Estate Investors

By Joe Nagel, Esq., LLM, CPA

A Federal Qualified Opportunity Zone is a new economic and community development program established by Congress in the Tax Cuts and Jobs Act of 2017 which encourages long-term investments in low-income urban and rural communities nationwide.

Georgia’s 260 tracts, located in 83 counties, represent some of the most concentrated poverty in the state and are found in both rural (60%) and metropolitan areas (40%). Investors can defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, the investment vehicle used to make investments in Qualified Opportunity Zones.  In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.

The following are the incentives offered to investors:

• Temporary, capital gain tax deferral:
  • The period of capital gain tax deferral ends upon 12/31/2026 or an earlier sale
• A step-up in basis:
  • Investment held for 5 years – Basis increased by 10% of deferred gain (90% taxed)
  • Investment held for 7 years – basis increased by another 5% of deferred gain (85% taxed)
• Forgiveness of additional gains
  • Investment held for 10 years – Basis equal to fair market value; forgiveness of gains on appreciation of investment of sale or exchange of Opportunity Fund investment.  This exclusion only applies to gains accrued after an investment in an Opportunity Fund.

Although certain rules are still being defined, here’s what we know so far about the Opportunity Funds:

• They must be certified by the U.S. Treasury Department.
• They must be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone property.
• They must hold at least 90 percent of their assets in a Qualified Opportunity Zone property, which includes newly issued stock, partnership interests or business property in a Qualified Opportunity Zone business.
• They must have investments that are limited to equity investments in businesses, real estate and business assets that are located in a Qualified Opportunity Zone.
• Loans are not eligible for the tax incentives.
• Opportunity Fund investments in real estate are subject to a substantial rehabilitation requirement.

Ultimately, this program is a game changer that will provide significant tax benefits for real estate investors while looking to revitalize America’s depressed communities through social impact investments.

For more information regarding this program or any other business or tax concern, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.