On December 19, 2019, the United States Department of Treasury finalized regulations providing guidance regarding investments in Qualified Opportunity Zones (QOZ(s)). In order for individuals (or businesses) to invest in these QOZs (several of which are located in the Lehigh Valley) they must first form a qualified opportunity fund (QOF). A QOF can be most types of entity, and self-certifies by submission of a simple form to the IRS. With the stock market at record highs, many investors are currently sitting on unrealized or realized capital gains that will be soon be subject to tax if not properly deferred. This is when QOZs/QOFs can be utilized to help minimize an investor’s tax burden.
Generally, if an investor invests in a QOF that invests in a QOZ, all of the investor’s capital gain placed into the QOF is deferred until an “inclusion event” occurs, or Dec. 31, 2026, whichever is earlier. At such, tax is due on the deferred gain with a small step up in basis. However, the main benefit that QOZs/QOFs provide is the permanent exclusion of post-acquisition gains from the sale of an investment in a QOF that was held by an investor for more than 10 years. As an example, if $100 of capital gain is invested in a QOF and the QOF sells its property 11 years later, the investor will pay tax on $90 on December 31, 2026 and then pay no additional tax at all on the sale of the asset. The rules regarding QOFs/QOZs are complex and non-compliance can result in significant fines/penalties.
At FLB, our attorneys are experienced in QOZs/QOFs legal matters including, but not limited to:
- Formation of QOFs
- Developing entity and business structures to best fit each investor’s QOF goals
- Drafting QOF specific operating agreements that comply with the applicable rules and regulations
- Obtaining various approvals and zoning issues.