Qualified opportunity zones are census tracts that are composed of economically distressed communities. This was created by the Tax Cuts and Jobs Act of 2017, which allowed certain investments in lower income areas to have tax advantages. To qualify as an opportunity zone, an area needs to meet certain low-income requirements, such as a poverty rate of at least 20 percent. Since more and more people are gaining interest in investing in qualified opportunity zones, this article answers some of the frequently asked questions about them.
What are the benefits of qualified opportunity zones?
A common reason that people want to invest in these areas are the opportunity zone tax benefits. For example, when an investor sells an appreciated asset, they realize a capital gain, which will get taxed. When they invest their capital gain in an opportunity zone, though, they receive opportunity zone tax benefits, such as a deferral of taxes on previously earned capital gain.
What is the purpose of opportunity zones?
Qualified opportunity zones are used as an economic development tool because they create jobs and income in distressed areas.
What are the risks of opportunity zone investments?
Although qualified opportunity zones are made for economic development, one concern is that it will negatively impact a community. These new investments may result in the loss of affordable housing and the gentrification of neighborhoods, resulting in displaced residents. In addition, there are inexperienced people who are starting businesses solely because of the opportunity zone tax benefits. As a result of their lack of knowledge in running a company, their business’ may fail.
What is the 50 percent of gross income test?
A qualified opportunity zone business must earn at least 50 percent of its gross income from business activities within the opportunity zone. There are 3 ways that a business can meet these requirements: hours of services received test, amounts paid for services test, or necessary tangible property and business functions test. A business only needs to meet one of the requirements to pass the 50 percent of gross income test.
What is a qualified opportunity fund?
A qualified opportunity fund is any investment from a corporation or partnership with the purpose of investing in a qualified opportunity zone property. A qualified opportunity fund can become designated as an opportunity fund by filing the IRS form 8996 with their federal income tax return. The fund must invest a minimum of 90 percent of its assets in opportunity zones to receive opportunity zone tax benefits.
If the process is done properly, qualified opportunity zones are a great investment and can have a positive impact on a community. If you´re interested in investing in an opportunity zone, there are opportunity zone attorneys that will assist you throughout the process.