Through the Tax Cuts and Jobs Act (“TCJA”), in 2017 Congress enacted Code Sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code (the “Code”). These Code Sections were designed to encourage investment and economic growth in certain-low income communities by creating a procedure for identifying Qualified Opportunity Zones (“QOZs”) and offering certain federal income tax incentives to taxpayers who invest in businesses located in them. Code Section 1400Z-1 provides the procedure for designating QOZs and Section 1400Z-2 outlines the tax benefits associated with investments into these zones.
To benefit from a QOZ: (1) a taxpayer recognizes capital gain; (2) the capital gain is reinvested into a QOF within 180 days of generating the capital gain; (3) the assets of the QOF satisfy numerous requirements outlined in the Proposed Regulations; (4) the gain is deferred; (5) after five years, 10% of the deferred gain is eliminated; (6) after seven years, another 5% of the deferred gain is eliminated; (7) at the latest, the remaining 85% of the deferred gain must be recognized on December 31, 2026; and (8) after ten years, the investment in the QF can be sold tax free.
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