TCJA created the Qualified Opportunity Zone (QOZ) program, which offers capital gains tax deferrals for qualifying investments in low-income communities. Unlike similar programs that restrict investment uses and cap tax benefits, the QOZ program accepts a broad array of investment types and amounts. It also provides significant tax benefits, with the potential to permanently defer capital gains taxes in some instances.

1. © Copyright 2018. CBIZ, Inc. NYSE Listed: CBZ. All rights reserved.
BY PAUL ROSENKRANZ, CBIZ MHM, LLC
T
ax incentives for investments in low-income
communities are nothing new, but the law
commonly known as the Tax Cuts and Jobs Act
(TCJA) sweetens the pot for potential investors. The
TCJA created the Qualified Opportunity Zone (QOZ)
program, which offers capital gains tax deferrals for
qualifying investments in low-income communities.
Unlike similar programs that restrict investment uses
and cap tax benefits, the QOZ program accepts a broad
array of investment types and amounts. It also provides
significant tax benefits, with the potential to permanently
defer capital gains taxes in some instances.
Real estate developers (individuals or corporations),
syndicators, sponsors or private equity funds can all
participate in the QOZ program. Taking advantage of
the full tax benefits available can be a little complex,
however, in part because the TCJA legislation that
created the program is rife with ambiguities. Additionally,
investors will need to understand what opportunities
meet the program’s stringent criteria.
Ground Rules and Key Definitions
Investors can take advantage of the QOZ program by
selling or trading virtually any investment and investing the
capital gains from the sale or exchange into a Qualified
Opportunity Fund (QO Fund) within 180 days of the sale
or exchange of the existing investment. A QO Fund is a
corporation or partnership organized to invest in QOZ
property, and it must invest at least 90 percent of its funds
in QOZ property. Eligible QOZ property is QOZ stock, a
QOZ partnership interest, or a direct investment in trade
or business property (TOB property) of a QOZ business.
In the case of a QOZ stock or partnership interest, the
corporation or partnership interest must be newly issued
(Continued on Page 2)
1-800-ASK-CBIZ • www.cbiz.com/CommercialRealEstate BizTipsVideos@cbz CBIZ
How Qualified Opportunity Zones
May Help Real Estate Developers &
Investors Circumvent Capital Gains Tax

2. (Continued from page 2)
and acquired by the QO Fund solely for cash, and the
corporation or partnership that issued the interest must
operate a QOZ business.
According to FAQs released by the IRS in June 2018:
“To become a Qualified Opportunity Fund, an
eligible taxpayer self certifies. (Thus, no approval
or action by the IRS is required.) To self-certify, a
taxpayer merely completes a form (which will be
released in the summer of 2018) and attaches
that form to the taxpayer’s federal income tax
return for the taxable year. (The return must be
filed timely, taking extensions into account.)”
To qualify as a QOZ business, substantially all of
the entity’s tangible property must be TOB property
purchased after Dec. 31, 2017 and put into use as a
result with the QO purchase. As an alternative to the
original use requirement, the QO Fund or the underlying
QOZ business could be used to substantially improve
(defined as capital expenditures exceeding the original
purchase basis during a 30-month period) an existing
property, and substantially all of the use of the property
must be in a QOZ. Additionally, a QOZ business must
have a minimum of 50 percent of its gross income
derived from the active conduct of a trade or business in
the QOZ. Other provisions also apply to determine a QOZ
business, including the type of business being operated.
Holding Periods for Deferral and Exclusion
Generally speaking, there is no minimum required holding
period to take advantage of the QOZ program, but the
longer the investor holds the QO Fund investment, the
greater the benefits. Investments that meet the program’s
criteria will have a capital gain deferral until the earlier of the
amount of time the taxpayer holds the investment or Dec.
31, 2026. Investors who hold the QO Fund investment for
at least five years will benefit from a basis increase equal to
10 percent of the original gain deferred (i.e., only 90 percent
of the deferred gain invested in a QO Fund that held for at
least five years will be subject to tax). If investors hold the
investment for at least seven years, their basis increase will
be 15 percent (i.e., only 85 percent of the original deferred
gain will ultimately be taxable).
A post-acquisition gain exclusion is available for QO Fund
investments that satisfy a 10-year holding period. The
taxpayer can then elect on the sale of the investment
to have a basis of the QO Fund investment equal to its
fair market value, resulting in none of the gain from the
QO Fund investment being taxable when sold other
than the aforementioned deferred gain recognized by
Dec. 31, 2026.
Early Bird Gets the Worm
Investors looking to maximize the capital gain deferrals
available will want to move quickly. The TCJA authorized
the QOZ program only through Dec. 31, 2028, and it is
uncertain whether a taxpayer is entitled to the capital
gain exclusions after this date. Barring further changes,
the latest date a taxpayer could make an investment
that would qualify for a post-acquisition gain exclusion
would be Dec. 31, 2018. Likewise, because the basis
increase applies to the original deferral gain from the
existing investment and because this deferred gain
must otherwise be recognized by Dec. 31, 2026, the
last date to make a QO Fund investment that is eligible
for a basis bonus is Dec. 31, 2021 (for the 10 percent
basis increase) or Dec. 31, 2019 (for the 15 percent
basis increase).
A tax professional can help identify where QOZs are
located in your area and what opportunities may be
available to you. A complete listing of QOZs can be
found online through the Treasury Department. For more
information about the new QOZ program and its benefits,
contact Paul Rosenkranz or your local CBIZ MHM tax
professional.
Related Content
■ ■ The Impact of the New Tax Law on Real Estate
Investment
1-800-ASK-CBIZ • www.cbiz.com/CommercialRealEstate BizTipsVideos@cbz CBIZ
Paul Rosenkranz is a Managing Director
in the CBIZ MHM Los Angeles office.
He has advised clients on tax
minimization and business growth for
over 30 years. He can be reached at
prosenkranz@cbiz.com or 310.268.2029.