A: Qualified Opportunity Zones are low-income census tracts that have been nominated by the state governors and approved by the Secretary of the Treasury for special investment status. Currently, there are 8,700 QOZs across the US and its territories. The goal of the government in offering this tax break is to stimulate investment in and improvement of these areas.
A: The IRS has a list here: https://www.irs.gov/pub/irs-drop/n-18-48.pdf
That list is limited to information like the facts that there are seven tracts in Hamilton County and two in McMinn County. A more helpful map for locating tracts Tennessee is here: https://opportunitydb.com/location/tennessee/
A: Not exactly. There are rules. Many rules. Convoluted ones. One rule is that you can’t just buy land and hold it. You have to improve the property. Other rules lay out what kind of entities can participate, how much the property must be improved, how long the investment can last, what percentage of the assets can be outside the QOZ, etc.
A: You can invest in a QOF, a qualified opportunity fund, which has already done all the reading, developed a business plan, and will be directly improving a property in a QOZ. It’s like investing in tech company stock rather than starting up your own.
A: Make an appointment with Marilyn or Jason to discuss the rules and your business plan.
A: Because the tax benefits are amazing. You can take any kind of capital gains and, within 180 days, put it into a QOF. Presto! You don’t have to pay tax on those gains until December 31 2026, as long as you leave those gains in the fund. If you leave the gains in the QOF for at least five years, 10% of those gains become non-taxable. If you leave the gains in for at least seven years, another 5% becomes non-taxable. So if you invest $2,000 of capital gains, after five years, $200 is no longer taxable, and after another two years, $100 is no longer taxable.
For tax year 2026, you will have to pay taxes on the remaining 85-90% of capital gains ($1700-1,800) whether you have sold out of the QOF or not. This could cause a cash flow problem for some investors who haven’t planned for it.
A: Maybe not. You might not want to sell out by 2026, because the best benefit is that if you hold the QOF investment for at least 10 years, any gains you make on the investment can be excluded from taxable income. In our example, if you invested that $2,000 in 2019 and then sold your share for $3,500 in 2030, you wouldn’t have to pay taxes on the $1,500 of gains you made from your QOF investment.
A: Don’t let the tax benefits blind you to a bad investment. You need to check any QOF you are thinking of investing in. Are the fund managers reliable? Does their business plan look solid? The tax breaks only really work for you if the project is profitable.
A: Well, 2019 is the last year to invest and get the full seven years in by the end of 2026.
A: If you think a fund is right for you, talk to your financial advisor. If you are interested in using your gains to do a project like this yourself, give us a call. We’ll set up an appointment to go over the fine details, because if you aren’t in compliance, you won’t get the tax breaks. And we are all about helping our clients get tax breaks.
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