A Tax Deferral Tool
The 2017 Tax Cuts and Jobs Act (P.L. 115-97) introduced the Qualified Opportunity Zone (“QOZ”) program under I.R.C. Section 1400Z-1 and 1400Z-2. The QOZ program is an economic development platform intended to encourage private investment into low-income communities throughout the United States and U.S. territories and is generally effective January 1, 2018, through December 31, 2026.
Federal Tax Deferral
The QOZ gives taxpayers a federal tax deferral (as well as a potential partial permanent tax savings) of realized capital gains on the sale of appreciated assets. The taxpayer will still need to recognize the ordinary gain portion on the initial sale, but can effectively defer the portion of the gain subject to 20% or 23.8% capital gains tax, depending on the taxpayer’s specific facts and circumstance. For example, taxpayers will experience different marginal rates depending if the original investment was active, passive, or investment portfolio activity. Note that further guidance from the Internal Revenue Service (“IRS”) is required in this area.
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