Qualified Opportunity Zone Funds have the potential to create large tax savings for investors, but they are not beneficial for every taxpayer.
The Tax Cuts and Jobs Act (TCJA) [1] created the Qualified Opportunity Zone (QO Zone) policy. Codified in Sections 1400Z-1 and 1400Z-2, this new policy is designed to encourage investment in low-income rural and urban areas. The QO Zone provisions replace the New Markets Tax Credit (NMTC), and they restructure the method of distributing tax benefits for investments in the economically-distressed areas that are the target of these policies.
The Qualified Opportunity Zone policy is organized into two parts: (1) the designation of Qualified Opportunity Zones (QO Zones) by state Governors, and (2) the creation of Qualified Opportunity Funds (QO Funds) by private investors. The tax incentives for QO Fund investments are structured as gain deferrals that can become gain exclusions as the holding periods in the QO Fund increase.
QO Funds have the potential to create large tax savings for investors, but they are not beneficial for every taxpayer. The purpose of this article is to describe the QO Zone policy, illustrate the tax savings potential, and identify factors financial and tax planners should consider before recommending these investments to clients.
[1] P.L. 115-97, 12/22/17.