Opportunity Zones | Madison 1031

What are
Opportunity
Zones?

Opportunity Zones (OZs) are part of a developmental program through the 2017 Tax Act that promotes the long-term investment in and development of low-income urban and rural real estate across the United States.

Each OZ is a selected geographic area which exceeds certain rates of poverty and therefore has a need, and significant potential, for revitalization. Current OZs can be found in every state.

What are
Opportunity
Funds?

An Opportunity Fund is an investment vehicle for those that would like to invest in OZs, and receive the tax benefits that come along with such an investment.

For a partnership, corporation, or LLC to qualify as an Opportunity Fund (QOF), they must hold 90% of their total assets within OZs. Each QOF must comply with this and other statutory requirements in order to use the tax benefits.

How to Invest
in an OZ?

OZ INVESTING REQUIREMENTS:

The investment must be a reinvestment
of realized capital gains

To be eligible for tax benefits, the investor must invest those capital gains through a QOF.

The investment must take place within 180
days of the realized date of those capital gains.

After these requirements are met, tax breaks are earned at three distinct milestones. Investors hit those milestones based on how many years they’ve held their investment in a QOF.

Benefits of
investing in an OZ?

After holding the investment for at least 5 years, the investor receives an increase in basis of 10% of their original deferred gain.

After holding the investment for at least 7 years, the investor receives an increase in basis of 5% of their original deferred gain.

After holding the investment for 10 years, the investor receives a permanent exclusion from taxable capital gains on their QOF investment.

Difference between
QOF
investment &
1031 Exchange.

COMPARISON OF OPPORTUNITY ZONES
AND SECTION 1031

Opportunity Zones

Section 1031

Opportunity Zones

Section 1031

Eligible Investment Assets

All property (real or personal) located in an Opportunity Zone

Real Property held for investment or business purpose

Eligible Gains for Deferral

Any taxable capital gain, but not ordinary gains

All gains from real property

Eligible Amount for Deferral

Capital gains, in any amount

All proceeds

Qualified Intermediary/QOF

No intermediary is required, but QOF annual reporting is required

A Qualified intermediary is required

Investment Deadlines

180 days to invest in a QOF

45 days to identify 180 days to close

Minimum Holding Periods

5,7, and 10 years for tax benefits to begin

No time restrictions

Timing of Recognition of Taxable Gains

December 31, 2026 on original gain, unless sold earlier

Upon sale, unless another exchange is completed

Note: Based on the second set of Treasury Regulations it appears that in most cases a taxpayer can enter into a 1031 exchange and then, if it fails, invest in an Opportunity Zone

OpportunityZones

OpportunityZones

Opportunity
Zones

Opportunity
Zones