Qualified Opportunity Zone Fund Investments
Qualified Opportunity Zones – a provision in the 2017 Tax Reform Bill – emerged as a hot topic with the first round of new proposed regulations released in October 2018. Published on April 17, 2019 the second round of proposed regulations intended to clarify the rules related to the QOZ federal income tax incentive were published. Varnum attorneys Fred Schubkegel, Mary Kay Shaver, Katie Roskam and Tom Hillegonds have created two white papers to explain the important points of the QOZ incentives based on the guidance currently available. These proposed regulations need to be finalized and more guidance is expected from the IRS in the coming months.
What Are Qualified Opportunity Zones?Qualified opportunity zones (QOZ) are economically distressed areas around the country that have been nominated by each state and approved by the Treasury to participate in this economic incentive. Each state was allowed to designate up to 25 percent of its low-income communities as QOZs. QOZs retain their designation for 10 years.
What Are the Tax Benefits of Investing in a Qualified Opportunity Zone?
The tax benefits are three-fold:
- Capital gain deferral: If a taxpayer realizes capital gains and invests in a Qualified Opportunity Zone Fund (QOF) within 180 days, the taxpayer is able to defer the tax on the capital gains until the earlier of the date on which the QOF investment is sold or December 31, 2026. The proposed regulations provide that all of the deferred gain’s tax attributes are preserved through the deferral period and are taken into account when the gain is included.
- Basis step-up: If the taxpayer’s investment in the QOF is held for five years, the taxpayer will receive a 10 percent step-up in basis (10 percent of the gain deferred) and an additional five percent if the investment is held for seven years (for a total of 15 percent of the gain deferred). These basis increases can be used to offset the deferred capital gain that will be recognized on the earlier of the date on which the QOF investment is sold or December 31, 2026 as stated above.
- Non-recognition for 10-year investments: If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer will not pay tax on gain from sale of QOF interest. This benefit applies to gain resulting from appreciation over the invested gain amount and can be taken advantage of through an election to “step-up” basis.
Where Are Qualified Opportunity Zones Located in Michigan?
QOZs are located in every county in Michigan. Click here to view QOZ maps of select Michigan locations. For more information on finding designated QOZs, please visit the U.S. Department of Treasury's CDFI Fund website. The list will be updated as more opportunity zones are approved.
Structured a Qualified Opportunity Zone (QOZ) Fund for the expansion of a nonprofit senior center in cooperation with a private developer. Work included development of fund formation documents, educational materials and partnership agreements.
Organization and documentation of QOZ Fund to purchase/renovate Elkhart Hotel in Indiana.
Advice regarding organization of QOZ Fund by economic development entity for spec project (100,000 square feet of industrial development) to attract new companies/jobs to Southwest Michigan community.
Advice regarding organization of QOZ Fund to assist faith-based nonprofit entity promoting development in urban areas of Great Lakes region, including partnering with for-profit ventures.
Advice regarding using QOZ Fund and benefits to assist rebuild and reinvestment in Florida area recovering from hurricane damage.
Advice regarding organization of QOZ Fund by economic development entity for multi-project development to attract new companies/jobs to West Michigan community.
Advice regarding organization of QOZ Fund to acquire/develop movie theatre project and spinoff development in Detroit area.
Advice regarding organization of QOZ Fund to redevelop urban properties held by Landbank in central Michigan community to attract new users/employers and related jobs.
Advice to investors regarding QOZ Fund investments and verifying compliance of those QOZ Funds with QOZ tax compliance requirements.
Multiple presentations to national and Michigan audiences of real estate developers, economic developers, investors, financial advisors, bankers, accountants and attorneys regarding QOZs.
News & Publications
- Tax Advisory, April 25, 2019
- Tax Advisory, January 23, 2019
- Tax Blog Post, July 9, 2018