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Zone In On New Biz Opportunity

(posted: February 17th, 2020)

Yellow road sign,

Opportunity may be knocking for some entrepreneurs.

Strategy: Make investments in an "Opportunity Zone" designated by the Tax Cuts and Jobs Act (TCJA). If you meet certain requirements, you can defer capital gains for up to the next seven years.

The IRS issued proposed regulations in 2018 clarifying some of the key rules. Then it provided additional guidance earlier this year.

The TCJA created Opportunity Zones to spur investment in distressed communities. Currently, more than 8,700 communities spread throughout all 50 states, the District of Columbia and five U.S territories have been designated as Opportunity Zones. The designation is good for ten years.

Under the proposed regulations, investors may defer tax on most capital gains through 2026 by investing in an Opportunity Zone and making an election. To qualify for deferral, the amount of a capital gain to be deferred must be invested in a Qualified Opportunity Fund (QOF), which is an entity organized for the purpose of investing in qualified Opportunity Zone property.

The QOF must hold at least 90% of its assets in qualified property. Investors who hold their QOF investment for at least ten years can increase their basis to the fair market value of the investment on the date it is sold.

Furthermore, the proposed regulations provide that if at least 70% of the tangible business property owned or leased by a trade or business is qualified Opportunity Zone business property, the requirement that "substantially all" tangible business property is qualified property is satisfied if other requirements are met.

The new 2019 guidance clarifies the "substantially all" requirements for the holding period and use of the tangible business property as follows:

  • For use of the property, at least 70% of the property must be used in a qualified Opportunity Zone.
  • For the holding period of the property, tangible property must be qualified Opportunity Zone business property for at least 90% of the QOF's or qualified Opportunity Zone business's holding period.
  • The partnership or corporation must be a qualified Opportunity Zone business for at least 90% of the QOF's holding period.

Tip: Deferred gains may become taxable if an investor transfers his or her interest in a QOF.

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