Tax Cuts and Jobs Act of 2017 created Qualified Opportunity Fund (QOF). The goal was to jumpstart economic development and job creation in these underserved areas by offering tax incentives to investors.
Current Effective Capital gains tax rate is 23.8% (FL state rate is 0%)
– Long-Term Capital Gains (assets held > 1 year and taxable income Over $518,900) – 20.0%
– Net Investment Income Tax (NIIT) – 3.8%
Main Tax Benefits
– Postpone paying capital gains tax until the earlier of the date you sell your QOF investment or Dec 31, 2026.
– If you hold the investment in the QOF for 10 years, you pay no Capital Gains tax on the appreciation of the QOF investment itself.
Eligible Investments
– Qualified Opportunity Zone Business Property (QOZBP) (e.g., real estate)
– Qualified Opportunity Zone Business (QOZB) (e.g., in operating businesses within the zone)
Requirements for Investors
– Must invest capital gains (not just any cash) into a QOF
– Must make the investment within 180 days of realizing capital gain (valid until 2047)
– must deploy 90% of its assets into Opportunity Zone property or businesses.
Requirements for Businesses:
– Must be physically located in a census tract designated as a Qualified Opportunity Zone
– Income Test – ≥50% of gross income must come from active conduct within the Opportunity Zone
– Tangible Assets Test – ≥70% of your business’s tangible property must be in the Opportunity Zone
– Intangible Use Test – at least 40% of intangibles (e.g., brand, customer lists) must be used in the Opportunity Zone
– Work requirement – At least 50% of employee work hours or compensation should be tied to work performed in the Opportunity Zone
– Active Business Test – Cannot be a passive business such as an investment vehicle
– Non-Qualified Financial Property Limitation – not more than 5% of property can be invested in unrelated business
– Sin Businesses Exclusion – Business must not be a golf course, country club, liquor store, casino, Hot/Sun tub facilities,.
– Substantial Use of Property – you may need to substantially improve it (i.e., double basis over 30 months), unless you acquired new items.
Compliance with Testing Dates
The business must meet these requirements on specific testing dates, typically the last day of the first 6-month period of the taxable year and the last day of the taxable year. The IRS allows averaging of property values across these dates to determine compliance with the 70% tangible property test. Strand Tax and Accounting Services will maintain bi-annual files regarding your compliance throughout the life of the Partnership.
Legal Entity & Fund Structure
– BLUE SKY QOF FUND LLC (QOF Fund) is created and managed by us as a partnership
– New partner deposit capital gains into QOF Fund
– QOF Fund invests into new QOZBP or QOZB Partnership
– New partner being appointed as a sole manager of new manager-managed QOZP or QOZPI Partnership
Related links:
Qualified Opportunity Zone Map – https://www.hud.gov/opportunity-zones
Qualified opportunity fund IRS Law 26 CFR § 1.1400Z2(d)-1 – https://www.law.cornell.edu/cfr/text/26/1.1400Z2(d)-1
Qualified Opportunity Fund IRS Regulations – https://www.irs.gov/credits-deductions/businesses/invest-in-a-qualified-opportunity-fund