Qualified Opportunity Zone Funds

by John Schachter, EA

What is a Qualified Opportunity (QO) Zone Fund?

The changes to the federal tax code for 2018 include a big new tax break for investors in so-called Qualified Opportunity (QO) Zone Funds. A QO Zone Fund is a vehicle for investing in property in QO Zones. There are almost 9,000 such zones around the country. Each state has designated areas for targeted investment. At its most basic, if you invest in a QO Zone Fund and hold your investment for ten years, you will pay zero tax on any gain in the fund. As a further benefit, if you sell other property at a gain–say, you cash in on a stock that ran up in value–you can defer tax on the gain by plowing the proceeds into a QO Zone Fund. By December 31, 2026, any deferred gain must be recognized and taxed. But not really: if you hold your investment in the QO Zone Fund at least five years, slices of the deferred gain are forgiven. So the longer you hold your reinvested funds in QO Zone property, the less tax you eventually will have to pay.

  • Quick example: you invest $200,000 in a QO Zone Fund in 2020. You sell out in 2031 for $500,000. You pay no federal tax on the $300,000 gain, because you held your investment at least ten years.
  • Fancier example: Years ago, you bought Apple stock at $10. Now it’s worth $100. You sell 2,000 shares for a gain of $90 x 2,000 = $180,000. Ordinarily you would have to pay tax on that gain; maybe $52,000 in federal capital gains and net investment income taxes. But you won’t have to pay tax till 2027 if you invest the $180,000 proceeds in a QO Fund. The longer the money stays in the fund, the less gain you will eventually have to pay tax on–though you probably will have to pay some tax at the end of the deferral period. Thenceforth, if you keep holding your investment in the fund, further gain may be excluded completely.

This is all so rich that funds are springing up like crazy and taxpayers are eagerly plowing money into QO Zones. Will they overpay? Taxpayers have a tendency to pay too much for tax breaks–taxes stimulate a toxic mix of greed and fear for many investors. But there could be an opportunity for skillful use of this program. And taxpayers who already own property in a QO Zone are in a sweet position to sell out or to raise capital to improve their property–and, hopefully, the economy–in a QO Zone.

Learn more about how this exciting new law could affect you. Talk to John Schachter + Associates today.