One of the most intriguing and discussed elements of recent tax reform is the creation of Qualified Opportunity Zones, which are economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. The tax benefits offered by investment in Qualified Opportunity Zones are meant to encourage economic development in these communities, which are officially designated at the state level. When a taxpayer realizes a capital gain, they may elect to defer (and even partially eliminate) the recognition and taxation of that gain by re-investing the gain in a Qualified Opportunity Fund (QOF), which is a corporation or partnership operating in a Qualified Opportunity Zone and meeting the certification requirements.
A taxpayer has 180 days from the date of the sale or exchange generating a capital gain to re-invest the gain in a QOF. Once the interest in the QOF has been held for five years, 10% of the deferred gain is permanently excluded. After holding the interest in the QOF for seven years, an additional 5% of the deferred gain is excluded, for a total of 15% of gain excluded for tax purposes. The deferred gain must be recognized on December 31, 2026, or sooner, if the interest in the QOF is disposed of. Therefore, it is important that the investment in the QOF be made before 2020 if you want to reach the maximum 15% of excludable gain by holding the investment for seven years. Furthermore, if the investment in the QOF is held for longer than 10 years, none of the gain created by appreciation in value of the investment after December 31, 2026, is recognized.
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