The recently-enacted Tax Cuts and Jobs Act includes a potentially powerful new program allowing taxpayers to defer and, in some cases, eliminate tax liability when the taxpayer invests realized capital gains in economically disadvantaged areas. The program is intended to encourage the reinvestment of capital gains into businesses and property located in qualifying low-income census tracts and tracts contiguous with the qualifying low-income tracts (“qualified opportunity zones” or “QOZ”). The QOZ investment must be made by the taxpayer within 180 days after the taxpayer sells or disposes of an investment that will result in the taxpayer realizing capital gain.
The primary benefits of the QOZ program include:
- a potential reduction (up to 15%) of the invested capital gains subject to tax;
- deferred payment of tax on the invested capital gains;
- potential exclusion of all capital gains arising post-investment; and
- broad flexibility in the types of investments that can be made to obtain the tax benefits.
A broad range of clients may potentially benefit from this program, particularly those that (i) will dispose of an investment that will result in the realization of significant capital gains, (ii) will realize capital gains from an investment not eligible for reinvestment in a like-kind exchange under Code §1031, or (iii) are looking to purchase property or start a business in a QOZ and need to raise capital.
The U.S. Department of Treasury recently designated the QOZ for Arizona and Colorado (announcement available here and map available here; please note that you will have to turn on the map “layer” relating to the QOZ tracts). Additional guidance and regulatory clarification are still needed regarding important aspects of the QOZ program, and some states have yet to receive designated QOZ (e.g. Nevada). We encourage you to contact your attorney at Fennemore Craig, or any of the authors of this update (hyperlinked above), if you have questions about the program.