oz frequently asked questions
Q. How were Opportunity Zones Created?
A: Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.
Q. What is an Opportunity Zone?
A: An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as OZ if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority of the Internal Revenue Service.
Q. What are the incentives of the opportunity zone program?
A: TEMPORARY DEFERRAL: A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the Opportunity Zone investment is disposed of or December 31, 2026.
STEP-UP IN BASIS: A step-up in basis for the deferred capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original deferred gain from taxation.
PERMANENT EXCLUSION: A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued on investments made through an Opportunity Fund. There is no permanent exclusion possible for the initially deferred gain..
Q. What does QOF stand for and what are they?
A Qualified Opportunity Fund (QOF) is any investment vehicle organized as a corporation or partnership with the specific purpose of investing in Opportunity Zone assets. The private sector is responsible for establishing Opportunity Funds.
Q: When I transfer property to a QOF, does my holding period of the property also transfer to my QOF eligible investment?
A: No. The Opportunity Zones tax incentives provisions determine a taxpayer’s holding period in a qualifying investment in a QOF without regard to the holding period of the cash or other property transferred to the QOF.
Q: I deferred gain based on an investment in a QOF, and now that QOF has dissolved before the end of my deferral period. What happens to my deferred gain?
A: When the QOF dissolved, the deferral period ended, and you must include the deferred gain when you file your return, reporting the gain on Form 8949.
Q: I deferred a gain based on an investment in a QOF, and now I gave the investment to my child before the deferral period had ended. Is there anything that I need to do?
A: Yes. The deferral period ended when you gave away the QOF investment. You must include the deferred gain when you file your return, reporting the gain on Form 8949.
Q: When is tangible property “original use” tangible property?
A: Tangible property is original use on the date first placed in service in the qualified opportunity zone for purposes of depreciation or amortization. Used tangible property satisfies the original use requirement if the property has not been previously placed in service in the qualified opportunity zone.
Q: Can inventory in transit be “qualified opportunity zone business property?”
A: Yes. Inventory of a QOF, including raw materials, does not fail to be “used in a qualified opportunity zone” solely because the inventory is in transit from a vendor to the QOF or from the QOF to a customer.
Q: Before the last day of my 2018 tax year but during the 180-day period beginning with the realization of a section 1231 gain, I invested the amount of that section 1231 gain into a QOF. The amount that I invested was less than my 2018 net section 1231 gain. Can I make a valid deferral election based on that investment, even though proposed regulations say that the 180-day period for my net section 1231 gain began on December 31, 2018?
A: Yes. Under these facts, because your tax year ended before May 1, 2019, your QOF investment can support a valid deferral election. Making that election will not impair your ability consistently to rely on all other aspects of proposed regulations published on May 1, 2019.