Origin of Opportunity Zones
Opportunity Zones were the brainchild of Sean Parker, who made a fortune off Napster, a music streaming site known for its dubious file sharing practices in the early 2000s, and as Facebook’s first president. Parker sought to minimize his capital gains tax liability on his tech-stock fortune1.
The Qualified Opportunity Zone or (“QOZ”) Program
The QOZ Program was created by the federal government as part of the Tax Cuts and Jobs Act of 2017.
The QOZ Program is intended to encourage investment in lower-income communities across the U.S., principally by providing certain tax incentives in return for committing long-term capital to these communities through investment vehicles called Qualified Opportunity Funds (“QOF”).
What Are Qualified Opportunity Zones
A QOZ is a designated census tract in the United States selected by a state governor and certified by the U.S. Department of Treasury for inclusion in the QOZ Program.
Each state’s governor is permitted to nominate up to 25% of the state’s qualifying census tracts for inclusion in the QOZ Program.
To qualify for inclusion, a census tract must satisfy one of the following low-income communities (“LIC”) tests based on the 2010 census:
- have a poverty rate of at least 20%,
- if the LIC is in a metropolitan area, have a median household income not exceeding 80% of the metropolitan median household income (or the statewide median household income, whichever is greater) or
- if the LIC is not located in a metropolitan area, have a median household income not exceeding 80%of the statewide median household income.
For investment purposes, some areas that didn’t make sense in 2010 make more sense in 2022. Some of the areas which governors have chosen are already up and coming and these areas were chosen to entice investors from across the country to flood dollars into their respective state.
Examples of Recognizable QOZs
- Downtown/South L.A.
- Phoenix, AZ (ASU Campus)
- Austin, TX (East Austin)
- Houston, TX (Medical District)
- Dallas, TX (Deep Ellum)
What are Qualified Opportunity Funds or (“QOF”)
A QOF is an investment vehicle that holds at least 90% of its assets in “Qualified Opportunity one Property’. QOFs can make investments in a wide variety of real estate and new or existing businesses. QOFs can hold single or multiple assets. Qualified opportunity zone property includes interests held by the QOF in a “Qualified Opportunity Zone Business’.
Tax Benefits
Two main tax benefits:
- Deferral of any realized capital gains, up to the amount invested in the OZ until 12/31/2026. (Tax Bill April 2027)
- Partnerships have three options for calculating their tax window.
- 180 days from sale of asset
- 180 days from 12/31 of the year it is sold
- 180 days from the partnership tax return deadline (March 15th)
- Partnerships have three options for calculating their tax window.
- Tax Free Growth of your OZ investment
- At the end of the 10 years, you can withdraw your entire investment out, tax-free. Alternatively, investors can continue to let it grow in a tax-free manner until 2047
Eligible Taxpayer
- Individuals
- C Corporations
- Partnerships
- Some pass-through entities
Capital Gains Eligible for Deferral
- Stocks, bonds, options, hedge funds
- Primary and secondary residences
- Businesses, machinery, commercial buildings
- Land, livestock, art, wine, automobiles
Disclosures:
2017 Tax Cuts and Jobs Act: Passed in December 2017, made several significant changes to the individual income tax. These changes include a nearly doubled standard deduction, new limitations on itemized deductions, reduced income tax rates, and reforms to several other provisions. In all, these changes simplify the individual income tax by eliminating the need for millions of households to itemize their deductions.
Qualified Opportunity Zone Property: a Qualified Opportunity Fund or (“QOF”) qualifying ownership interest in a corporation or partnership that operates a Qualified Opportunity Zone (“QOZ”) business in a QOZ or certain tangible property of the QOF that is used in a business in the QOZ. To be a qualifying ownership interest in a corporation or partnership,
- the interest must be acquired after December 31, 2017, solely in exchange for cash;
- the corporation or partnership must be QOZ business; and
- for 90% of the holding period of that interest, the corporation or partnership was a QOZ business
The information provided is for informational purposes only and should not be considered investment advice. The information contained herein reflects Callan Capital views as of the date of distribution. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Callan Capital does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Callan Capital is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Callan Capital. For detailed information about our services and fees, please read our Form ADV Part 2A, and our Form CRS which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (866) 912-4888