The Qualified Opportunity Zone (QOZ) program was enacted as part of the 2017 federal Tax Cuts and Jobs Act (TCJA) and is designed to direct long-term capital investments into eligible property located in a Qualified Opportunity Zone. There are 8,762 designated QOZ’s located throughout the United States, of which 8,532 are in low-income community tracts and 230 contiguous communities. Every county in New Jersey has at least one QOZ.
The TCJA provides benefits for investments in the designated zones through Qualified Opportunity Funds (QOF). Investors must make their investment through a QOF and not directly into property located within a QOZ. The QOF must be organized as either a partnership or a corporation, that is invests at least 90 percent of its assets in eligible property, located in a QOZ. Investors can defer federal taxes on capital gains, if they reinvest those gains in a QOF. These deferred capital gains are not taxed until the investment is sold or exchanged, or December 31, 2026. To encourage long-term investment, the investor will receive a step-up in the tax basis of the previously deferred gain of 10% after holding the QOF investment for 5 years. This will increase to 15% if the QOF investment is held for 7 years. The Act also provides for the elimination of federal tax on the post-acquisition gain, from the sale of the QOF after the investment is held for 10 years or longer.
The QOF must meet recordkeeping requirements in order to maintain eligibility and avoid penalties. Investors in the QOF’s also have recordkeeping requirements that they must follow in order to preserve their anticipated tax benefits. The Qualified Opportunity Zone tax benefits are for Federal taxes. State and local tax treatment will vary.
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