Qualified Opportunity Zone
Hi everyone, my name is Tan, and I am an independent CERTIFIED FINANCIAL PLANNER™ practitioner at TAN Wealth Management. The purpose of this educational video is to provide a basic understanding and awareness of the Qualified Opportunity Zone (QOZ).
What is a qualified opportunity zone (QOZ)?
A Qualified Opportunity Zone is a community that is economically distressed as stated by the Secretary of the U.S. Treasury.
What is a qualified opportunity fund (QOF)?
A qualified opportunity fund is an investment vehicle designed to invest in a Qualified Opportunity Zone.
What are the tax benefits to the investors?
● Tax-deferral. The investor can defer the tax on the eligible gain when the money is invested in a Qualified Opportunity Fund.
● Portion exclusion of the eligible gain. If the investor held the investment for at least 5 years, 10% of the eligible gain is excluded. If the investor held the investment for at least 7 years, 15% of the eligible gain is excluded.
● Adjustment of the cost basis. If the investor held the investment "for at least 10 years, the investor is eligible for an adjustment in the basis of the Qualified Opportunity Fund investment to its fair market value on the date that the Qualified Opportunity Fund investment is sold or exchanged."
https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions
For example, a client has $1,050,000 worth of tech stock and her cost basis in the tech stock is $50,000. Her capital gain is $1,000,000.
● In 2020, she sold all of her tech stock then use $1,000,000 to invest in a Qualified Opportunity Fund. She can do whatever she wants with the $50,000 because it’s her cost basis which is a return of principal.
● If she keeps her money in the Qualified Opportunity Fund for 10 years (2020 + 10 years = 2026), 15% of her initial investment is tax-free, which is $150,000 ($1,000,000 X 15%). She will have to pay capital gain on the $850,000 when she gets out of the Qualified Opportunity Fund in 2026.
● The $1,000,000 she invested in the Qualified Opportunity Fund, whatever the gain is, it’s tax-free. This is the adjustment of the cost basis to its fair market value. If the Qualified Opportunity Fund grows to $1,500,000 in 2026 when she gets out of the Qualified Opportunity Fund, $500,000 is tax-free. If the Qualified Opportunity Fund grows to $2,500,000 in 2026 when she gets out of the Qualified Opportunity Fund, $1,500,000 is tax-free.
This is directly from the IRS website and you can read more on Qualified Opportunity Zones (QOZs).
“How do QOZs spur economic development? QOZs are designed to spur economic development by providing tax incentives for investors who invest new capital in businesses operating in one or more QOZs.
● First, an investor can defer tax on any prior eligible gain to the extent that a corresponding amount is timely invested in a Qualified Opportunity Fund (QOF). The deferral lasts until the earlier of the date on which the investment in the QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for at least 5 years, there is a 10% exclusion of the deferred gain. If held for at least 7 years, the 10% exclusion becomes 15%. Additionally, the amount of eligible gain to include is decreased to the extent that the amount of eligible gain you deferred exceeds the fair market value of the investment in the QOF.
● Second, if the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an adjustment in the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged. As a result of this basis adjustment, the appreciation in the QOF investment is never taxed. A similar rule applies to exclude the QOF investor’s share of gain and loss from sales of QOF assets.”
https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions
What I went over is just a high overview and it’s the best-case scenario. The worst-case scenario is the Qualified Opportunity Fund investment is a bad investment and you lose your initial investment. All investments have risks and you have to make sure you read the details on the investments and ask a lot of questions. Thank you for watching. This is Tan, your trusted advisor.