Qualified Opportunity Zone (QOZ) Investing Basics

Qualified Opportunity Zone Funds

Now in its fifth year of existence, the Qualified Opportunity Zone (QOZ) program remains a new type of investment vehicle for a lot of investors. This is a shame, as QOZs offer investors a once-in-a-lifetime chance to capture incredible tax incentives on their investments while deploying capital into areas of the country that need revitalization. This is truly a win-win scenario. We will go over some QOZ investing basics while correcting some common misconceptions.

QOZ Tax Benefits for Investors

QOZs are physical locations – any of the more than 8,700 low-income Census tracts designated by state governors and approved by the Treasury Department in 2018. Investors can receive the tax benefits outlined below through Qualified Opportunity Fund (QOF) investments, a new type of investment vehicle created to facilitate the capital flow into these areas. We have found that there are numerous areas in path-of-growth locations that qualify as QOZs. In fact, Grubb Properties had completed or was developing four projects in these areas prior to their designation as QOZs.

A major caveat in QOZ investing is that only investments made with capital gains qualify for the tax incentives. When a person sells any property for a capital gain, they have 180 days from their sale date to invest in a QOF in order to qualify for the program. Once they do, they will receive the following two benefits:

• A deferral of the recognition of the investor's underlying capital gain until the earlier of December 31, 2026, or the sale of their investment in the QOF.
• A complete exclusion on the appreciation investment in the QOF if the QOF investment is held for 10 years.

Each of the above benefits has significant standalone value and can have profound impact on the value delivered to an investor. By deferring recognition of a capital gain, an investor is able to invest 100% of their capital, rather than paying capital gains now and, based on current federal capital gains rates, investing 76 cents on the dollar. The second benefit, the back-end tax forgiveness, is incredibly valuable in these types of long-term investments that are often weighted toward asset appreciation.

Investor Flexibility With QOZ Programs

Generally, any gain that would be treated for federal tax purposes as either a long-term or short-term capital gain – this includes sales of a small business, investment real estate, or even stocks held in a brokerage account.

Additionally, unlike the 1031 Exchange program, which the QOZ program is often compared to, investors have total flexibility and may invest all or any part of their gain in one or multiple QOZ investments. These two features provide an incredible amount of flexibility for people utilizing the program.