Qualified Opportunity Zones (“QOZs”) present a unique opportunity for investors with capital gains and qualified 1231 gains (hereinafter “Eligible Gains”) seeking to defer payment of tax on Eligible Gains and sourcing investment opportunities in high-growth urban markets.

What is a QOZ?

The Internal Revenue Code (the “Code”) defines a QOZ as “an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” In 2018, approximately 8,700 QOZs were created throughout the country as an economic development tool to deploy investment capital in real estate and other projects in underserved communities. These investment opportunities are projected to stimulate the economy and generate job growth.

What are the benefits of investing in a Qualified Opportunity Fund?

There are multiple tax benefits when choosing to invest Eligible Gains in a Qualified Opportunity Fund (“QOF”). First, if Eligible Gains are invested in a QOF that meets certain requirements under the Code, then such Eligible Gains are not recognized for tax purposes until the earlier of the date on which the QOF investment is sold or exchanged, or December 31, 2026. Second, if the QOF investment is held for at least 5 years then any tax due on such deferred Eligible Gains is reduced by 10% and an additional 5% reduction is provided if it is held for at least 7 years. Third, if the QOF investment is held for at least 10 years, then there is no tax due on the sale or exchange of such QOF investment. This is because the investor is eligible for a basis adjustment in the QOF investment to its fair market value on the date that the QOF investment is either sold or exchanged.

Have QOZs made a difference in the Community?

Yes. For example, Parramore Oaks, a 211-unit apartment complex in Orlando, has had great success from this program. Not only has it provided 96 affordable family units to families living in that community, but it has also received $20 million in tax credits and incentives providing an attractive economic return for investors.

Should you invest capital gains in a QOF?

Florida has many attractive invest opportunities to invest in QOFs. There are 427 QOZs in Florida and Orlando has numerous up-and-coming areas for investment opportunities.

Investing in a QOF may be overwhelming when considering the nuances and complexities of this program. There are several tax and real estate implications to consider and finding a trusted counsel and advisor is critical to navigate this investment opportunity. Waugh PLLC, specializes in tax and real estate law and can walk with you step-by-step to ensure you make the most of your Eligible Gains in this program.