The 2017 Tax Cut and Jobs Act included a new Section 1400Z that received little attention when first introduced, but stands to have a big impact on spurring investment in distressed regions of the country. Section 1400Z allows individual and corporate investors to defer recognizing capital gains on the sale of property if the sale proceeds are reinvested in a qualified opportunity fund, which is a partnership or corporation that invests in qualified opportunity zones. The governor for each state was given the authority to designate up to 25% of the state's low-income census tracts as qualified opportunity zones. A list of the currently designated zones can be found here.
In simple terms, Section 1400Z provides for tax treatment similar to Section 1031 like-kind exchanges of real property. A taxpayer can defer gain recognition where he or she sells property (which can be located anywhere in the U.S.) for capital gain and reinvests the proceeds in a qualified opportunity fund within a 180 day period. The recognition of the capital gain is deferred while the taxpayer holds the investment in the qualified opportunity fund. In addition, the capital gain may be eliminated in whole or part if the taxpayer holds the qualified opportunity fund investment for at least 5 years, as follows:
|
Qualified Opportunity Fund Investment Held |
Amount of Gain Permanently Eliminated |
|
Less Than 5 Years |
None |
|
At Least 5 Years |
10% |
|
At Least 7 Years |
15% |
|
At Least 10 Years |
100% |
For example, Bob sells $5 million of stock in 2018. Bob would normally recognize capital gain of $2.5 million on the sale. Bob instead invests the $5 million proceeds in a qualified opportunity fund that focuses on opportunity zones in Florida. Bob elects to defer the gain under Section 1400Z. As a result, Bob does not recognize his $2.5 million in capital gain, and does not pay the tax on his capital gain, until he liquidates his investment in the qualified opportunity fund. In addition, if Bob holds his investment for at least 10 years, he will never have to recognize the $2.5 million in capital gain from his 2018 sale of stock. Assume in 2029 Bob liquidates his investment in the qualified opportunity fund for $8 million. Bob will not recognize any capital gain on the sale because he held his qualified opportunity fund investment for at least 10 years.
Bob's example shows the benefit that Section 1400Z can provide investors, and we can expect to activity in the qualified opportunity zone area as more taxpayers learn of this new regime.
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