Opportunity Zone (OZ) Investing  

The December 31st, 2019 deadline to optimize OZ tax benefits is fast approaching.  

The Tax Cuts and Jobs Act of 2017 created the Qualified Opportunity Zone Program. Qualified Opportunity Zones (QOZ) are designated census tracts throughout the United States that have been selected by state governors for inclusion in the program. There are approximately 8,700 Qualified Opportunity Zones nationwide. The core goal of the program is to incentivize private, long-term investment in economically distressed and low-income communities. The program provides three major tax benefits to investors investing in Qualified Opportunity Funds (QOF) within Opportunity Zones:  

1)      Deferral of Gains from Other Investments – A taxpayer can defer capital gains taxes on investments if, during the 180-day period beginning on the date of sale of the investment, they invest in a Qualified Opportunity Fund. Any taxable gain invested in this manner would not be recognized until December 31, 2026, or until the interest in the fund is sold, whichever occurs first.

2)      Reduction of Taxes Payable on Deferred Gain − Capital gains taxes on the original investment may be reduced over time through a step-up in cost basis. Investors who hold their Qualified Opportunity Fund investment for at least five years prior to December 31, 2026, receive a 10% step-up; Investors who hold their Qualified Opportunity Fund investment for at least seven years prior to December 31, 2026 receive an additional 5% step-up for a total of 15%.

3)      Elimination of Capital Gains Taxes on Opportunity Zone Fund Investments−Investors who hold a Qualified Opportunity Fund investment for at least ten years pay no tax on the appreciation of this investment upon its sale, regardless of the magnitude of the gain.  

However, many are unaware that December 31, 2019 is the deadline to take full advantage of these tax benefits. In order to maximize the 15% exclusion of an earlier investment’s gain, one must have owned the QOF for at least seven years prior to December 31, 2026. This means the investment must be made no later than December 31, 2019. If an investor misses the 2019 year-end deadline, but still invests prior to December 31, 2021, they are still eligible for a 10% exclusion of the earlier investment’s gain.   

Finally, taxpayers that have net capital gains on all 2019 sales of Section 1231 Property (property used in a trade or business) or certain 2019 K-1 gains have until June 28, 2020 to invest in a QOF to realize the QOZ Tax Benefits. However, the taxpayer with a gain from Section 1231 Property realized in 2019 cannot invest in a QOF until December 31, 2019. In order to receive the maximum exclusion of 15%, one must be invested before year-end 2019. Thus, the taxpayer described must invest on the exact day, December 31, 2019 to maximize his or her QOZ Tax Benefits. 
Gries Financial Partners believe that Opportunity Zone Funds should be considered by any investor with either sizable low-cost basis equity positions or anyone who has recently sold or is thinking about selling a business. Opportunity Zone Funds offer these investors an attractive option to tax efficiently diversify their investment portfolios. Over the past year, our investment team’s comprehensive due diligence process has uncovered multiple high conviction strategies from long tenured, well-established developers with strong track records. If you are interested in learning more about Opportunity Zone investing before year-end, please contact Kris Jarosz, Director of Research, at 216 861 1148 or kris@gries.com.

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