True to their name, Opportunity Zones are creating exciting and emerging investment opportunities for those clients who wish to minimize capital gains taxes. The Tax Cuts and Jobs Act that went into effect on December 22, 2017, allows deferrals on payment of taxes on capital gains, so long as the gains were invested in a “Qualified Opportunity Fund,” which is a partnership (or limited liability company that chooses to be treated as a partnership or corporation). The QOF is an investment vehicle whose purpose is to invest in real property that has been identified by the federal government as an Opportunity Zone.
Not only do investors get a deferral of payment on gains until the earlier of the date that the subject property is sold or exchanged, or December 31, 2026; but, if the investor holds the investment longer than five years, there is a ten percent (10%) exclusion of the deferred gain. Better yet, if the investor holds the investment longer than seven years, that exclusion increases to fifteen percent (15%). For those patient investors that hold the investment at least ten years, the investor becomes eligible for an increase in the basis of its investment equal to the fair market value on the date that the property is sold or exchanged. Assuming that the property increases in value over time, the increase in basis operates as a very significant reduction in overall gains taxes due from the investor.
In Maryland, there are designated Opportunity Zones in the following counties: Allegany, Anne Arundel, Baltimore, Calvert, Caroline, Carroll, Cecil, Charles, Dorchester, Frederick, Garrett, Harford, Kent, Montgomery, Prince George’s, Queen Anne’s, St. Mary’s, Somerset, Talbot, Washington, Wicomico, and Worcester.
This area of law is little understood by many investors and legal practitioners, particularly because the IRS did not issue substantive guidance on many terms of the QOFs until the fall of 2018. This means that the market is not yet flooded with investors willing or able to invest in QOFs. That makes 2019 the ideal time for investors to consider investing in a QOF. YVSM is well-equipped to handle Opportunity Zone matters, given its familiarity with transactional, property and business law, and Ms. Hopkin has handled these matters with the assistance of actively-involved accountants necessary to ensure that the client’s needs are met in all areas of the transaction.