The Tax Cuts and Jobs Act of 2017 established a new federal tax incentive called Opportunity Zones to encourage long-term investment in low-income census tracts around the country. There are 62 designated census tracts in Iowa, including most of downtown Cedar Rapids and sections of Coralville and Iowa City.
Investors looking to take advantage of the maximum tax benefit allowed from the program should consider establishing a Qualified Opportunity Fund (QOF) and investing gains from the sale of capital assets before December 31, 2018.
One of the key tax incentives available through Opportunity Zones is a 15 percent tax exclusion of deferred capital gains reinvested through a QOF into an eligible property and held for seven years. For investments in a QOF held longer than five years, taxpayers may exclude 10 percent of the deferred gain from inclusion in income. This benefit is coupled with a full 100 percent tax exclusion of the appreciation of the QOF investment if the investor holds the investment in the Opportunity Fund for at least ten years.
The deferred gain must be included in income in the taxpayers 2026 taxable year, the final date under section 1400Z-2(a)(2)(B) for the deferral of gain.
While Treasury has not provided guidance on this point, it is possible that the IRS could take the position that because the statute requires that deferred gain be recognized in the 2026 tax year (which could be considered January 1, 2026), in order to hold an investment in a QOF for “at least seven years” and, thus, be entitled to the maximum 15 percent exclusion on the deferred gain would require that the investment in the QOF be made no later than December 31, 2018. If the IRS takes this position and the investment of gains in a QOF happens after the close of 2018, the best you may be able to do is 10 percent exclusion based on the way the regulation is structured.
Accordingly, making an initial investment of realized gains in a QOF before December 31, 2018, provides the best chance to maximize the tax incentives provided in under this new program. Please contact myself or a Shuttleworth & Ingersoll attorney if you have questions.