Tax Benefits By Using Qualified Opportunity Zones

A couple of weeks ago in my 18 Last Minute Tax Tips for 2018, I mentioned utilizing a new tactic called Qualified Opportunity Zones (QOZ). Investing in one of these zones is meant to help create jobs and spur economic development in distressed communities while providing a tax benefit to you. Making this investment may allow you to defer paying capital gains taxes if your investment meets certain criteria.

Eligible businesses include partnerships and pass-through entities, such as an S-Corp. The rules also allow estates and trusts, as well as their beneficiaries to participate.

QOZ rules are as follows:

• You must invest the QOZ within 180 days of receiving the capital gains.
• You will be required to elect deferral on Form 8949 when you file your tax return.
• The money invested much come from equity; interest accumulated via debt is not eligible.

A few other considerations to take note of is that the longer you stay invested in the O-zone the greater your deferred gain. First, you need to understand the original deferred gain— less the amount excluded due to the five and seven-year holding periods—is recognized on the earlier of sale or exchange of the investment, or on December 31, 2026.

Here’s an example, if you invest for five years, you’ll be eligible to exclude 10% of the original deferred gain. Or if you choose to stay in for another two years, which is a total of seven years, then you’ll be able to exclude 15% of the original deferred gain. Holding the investment for at least 10 years increase its basis of the QOZ investment equal to its fair market value on the date that the QOZ investment is sold or exchanged. This may eliminate all or a substantial amount of gain due to appreciation on the QOZ investment.

For more information about QOZ’s, visit this link or speak with your tax advisor to discern whether this option is a good choice for you.