How to Make the Most of the Qualified Opportunity Zones
One of the biggest cryptocurrency news stories in the last month is the announcement of the blockchain society being planned by Block Chains, LLC in Nevada. Personally, I am excited to see what comes of this project. Due to the location of the project being squarely in an Qualified Opportunity Zone (QOZ) there are significant tax advantages to investing in businesses and real estate in this zone. While these benefits are not exclusive to this specific project (as all 50 states and some US Territories have these zones) I will use it as an example of how to maximize this new tax law.
What is the Qualified Opportunity Zone?
The Tax Cuts and Jobs Act includes tax law updates that provide for Qualified Opportunity Zones (QOZs). The QOZs were created as a way to spur economic development in underdeveloped areas. This program allows you to defer capital gains you realize by reinvesting them within 180 days of the initial sale, provided the investment meets certain criteria (we will go over these later in the article). The longer you hold the property in the QOZ, the greater your increase in basis. Holding the investment for 5 years will result in an increase in basis of 10%, after 7 years in the QOZ, you will receive an additional 5% increase in basis for a total of 15%. After 10 years, your property will step up in basis to the fair market value at the time.
For example, if you liquidate Bitcoin January 1st, 2019, with a gain of $100,000 to purchase a piece of real estate in a QOZ, and hold that interest through Dec 31st of that year, you will owe tax on $85,000 worth of gains as your basis has increased $15,000 on the gains. Once the 10 year mark is crossed you can sell the property for $250,000 and will recognize no gain, as the fair market value is now the basis. This of course assumes you meet all the requirements, holding it for the entire period until 2026 when you owe tax.
In order for your investments to qualify you will have to meet the following requirements:
For buying real estate:
- You must improve the property 100% of the value of the building of the purchased property within 30 months
For Setting up a business:
- 70% of a business’ tangible assets must reside in the QOZ
When you have capital gains, you have 180 days to reinvest in order to defer the gain. This rule is a bit different for a capital gain that is passed through an entity like a partnership or an S Corporation; in this case, your start date for the 180 day count is Jan 1st in the year in which you receive your K-1 showing the capital gains that flow through to you.
What it means for companies
Even if you cannot realize the benefits for yourself, you can utilize the zones if you are looking to court outside investment. By being in a QOZ, you are able to help investors defer capital gains reinvested into your company (again, provided it meets the specific QOZ requirements).
Block Chains, LLC
If you were to move your business to the QOZ in Block Chains, LLC’s new crypto community, you could court investors as a tax advantaged investment. You could then purchase land and improve it significantly -- think vacant land and constructing an apartment complex there. Real estate gives you a unique advantage in that it allows you to have a cash flowing asset that you could depreciate against said cashflows; then sell once you hit your 10 year market due to the step up in your basis in the real estate. You could do the same with an office or industrial building. Those that have first shot at the real estate should generally see the greatest returns as the barrier to improve the property will be lower than those that buy real estate that is already improved.
If you would like to find out whether or not a QOZ investment makes sense for you, if structuring your business in a QOZ would help your business grow, or you would be interested in joining a qualified opportunity zone fund; please reach out to us.