One of the lesser-known changes found in the Tax Cuts and Jobs Act of 2017 is the establishment of qualified opportunity zones (“QOZs”). QOZs were created to encourage private investment in distressed communities throughout the United States while offering the potential for significant tax savings to investors. The Treasury Department has approved over 8,700 opportunity zones throughout the country. In Connecticut, a total of 72 opportunity zones were approved including downtown Danbury, Bridgeport Harbor and South Norwalk. One of the most notable opportunity zones within the tri-state region is Long Island City, New York, where Amazon now plans to establish a second headquarters.
Similar to a 1031 tax-free exchange, investing in a QOZ offers the ability to defer the payment of taxes on capital gains from the sale of an asset (until December 31, 2026). However, it also includes an added advantage of zero capital gains from the eventual sale of a QOZ asset if the new investment is held for at least 10 years.
In order to invest in a QOZ a person must do so through an opportunity zone fund (“OZF”). One can establish a fund by creating a limited liability company or similar entity, or through a financial advisor or real estate developer who are establishing investment funds that qualify as OZFs.
From a tax perspective, the deferral on the sale of a capital asset applies for any capital gain that would be recognized on the sale of any capital asset, such as real estate, stocks, bonds or even artwork, which is subsequently invested into a QOZ asset. Eligible QOZ assets consist not just of real estate, but also interests in a business that operates in a QOZ. For individuals, the rollover must occur 180 days from the date of the sale.
It is important to highlight that the opportunities associated with QOZs will not last forever. To invest in a QOZ you need to do so before June 30, 2027, and, after holding the asset for 10 years, you need to sell prior to the end of 2047, the year the law will currently sunset, to take your tax-free profit. The deferral on capital gains will expire at the end of 2026, so the sooner you act, the longer you can defer capital gains.
The establishment of QOZs present attractive new incentives to investors to revitalize Connecticut’s key urban centers. While the rules regarding opportunity zones are still being developed, recently published IRS proposed regulations have provided taxpayers with guidelines for investing in QOZs. To review a complete map of QOZs, visit https://www.cdfifund.gov/Pages/default.aspx. For more information, please contact James M. Powers (jpowers@brodywilk.com).