The 2017 Tax Cut and Jobs Act (2017 Act) created the federal Qualified Opportunity Zone program (QOZ or Program) effective in 2018 and operative up to the next three decades.
Beginning January 1, 2018 through December 31, 2026, individuals, corporations, REITs, and pass-through entities can sell their appreciated capital assets and elect to reinvest the resulting capital gain into a Qualified Opportunity Fund (QOF). The federal tax impact of participating in a QOF includes deferring qualified gains for up to eight years and permanently exempting up to 15% of the original federal gain and 100% of the post-reinvestment gain – after holding the investment for seven and ten years, respectively. State conformity to this law is varied and requires a careful state-by-state analysis.
The Program offers a powerful and flexible tax savings and diversification tool for taxpayers generating capital gains. To participate, taxpayers must roll all (or a portion) of their capital gains (whether short-term or long-term) into a QOF. The QOF must then timely (180-day window discussed below) invest the gain into undeveloped or developed real estate, a new or existing QOZ-based business, or into other qualified QOZ property. While most of the focus is on real estate projects, the Program also provides significant potential benefits for taxpayers investing in active businesses that operate primarily within a QOZ. A future sale of an active business at multiples of 6- to 8-times EBITDA can easily eclipse a healthy real estate appreciation.