By Dwight Kay, Founder and CEO, Kay Properties and Investments
Qualified Opportunity Zone Funds (QOZF) have become an integral part of the investment landscape in recent years for those investors seeking to defer capital gains taxes on the sale of appreciated assets. At Kay Properties, our team has helped many accredited investors nationwide understand and participate in Qualified Opportunity Zone Fund investments.
What is a Qualified Opportunity Zone?
Qualified Opportunity Zone Funds were implemented by the Tax Cuts and Jobs Act of 2017, and were designed to increase economic growth and development in lower income neighborhoods and communities. According to Indiana University’s Kelly School of Business1, there are more than 8,700 QOZs in the country, including in territories like Puerto Rico. The bottom line is that QOZs are a part of a social program with the intent of redeveloping impoverished districts throughout the country by driving private capital to underserved communities and Americans by offering tax incentives to investors. By investing in these zones, individual investors and corporations can receive tax incentives and deferrals.
But what are some specific reasons investors should consider Qualified Opportunity Zone Funds for tax advantages and return potential?
1. Significant Tax Advantages Available to Opportunity Zone Fund investors:
Deferred Capital Gains Taxes: Investors can defer taxes on any prior capital gains (these could be from the sale of real estate, stocks, a business, artwork, etc.) by investing in a Qualified Opportunity Fund (a fund set up specifically for investing in Opportunity Zones). These taxes can be deferred up until the date the investment is sold or until December 31, 2026, whichever comes first.
Step-Up in Basis: If the Qualified Opportunity Zone Fund investment is held for longer than 5 years, there's a 10% exclusion of the deferred gain. If held for more than 7 years, this exclusion increases to 15%. But the real attraction of this investment strategy is that If the QOZF investment is held for at least 10 years, any capital gains derived from the sale of the QOZF (not the original deferred gain) are considered tax-free.
2. Diversification of Portfolio*:
Diversifying one’s investments is a cornerstone principle of prudent planning for your family and future*. Opportunity Zone Funds allow investors to diversify into real estate within the designated zones. Many investors that consider QOZFs have sold a business or stock position and able to diversify into QOZFs that are focused on real estate as an asset class.