What is a Qualified Opportunity Zone?
Qualified Opportunity Zones (QOZ) are a new community-development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The QOZ program provides a tax incentive for investors to reinvest their unrealized capital gains into Qualified Opportunity Funds that are dedicated to investing into QOZs designated by each state’s governor.
Pennsylvania has designated over 300 census tracts across Pennsylvania as Qualified Opportunity Zones. Downtown Allentown has three census tracts that have been designated for a Qualified Opportunity Zone.
FAQ link from the IRS: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
Qualified Opportunity Zone Tax Incentives:
The Qualified Opportunity Zones (QOZ) program offers three tax incentives for investing in low-income communities through a Qualified Opportunity Fund:
A Temporary Deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into a Qualified Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the QOZ investment is disposed of or December 31, 2026.
A Step-Up in Basis: A step-up in basis for capital gains reinvested in a Qualified Opportunity Fund. The basis is increased by 10% if the investment in the Qualified Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
A Permanent Exclusion: A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a Qualified Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Qualified Opportunity Fund.
Qualified Opportunity Fund:
A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property located in an Qualified Opportunity Zone, and that utilizes the investor’s gains from a prior investment for funding the Qualified Opportunity Fund.