Qualified Opportunity Zones were created by the Tax Cuts and Jobs Act to stimulate economic development by spurring investment in distressed communities and providing tax benefits to investors. In April, the U.S. Department of the Treasury and the IRS designated Opportunity Zones in 18 states, including several in Ohio.
Investors may defer tax on capital gains until the earlier of the date on which the investment is sold or exchanged or December 31, 2026, as long as the gain is reinvested in a Qualified Opportunity Fund, which is an investment vehicle organized to make investments in Qualified Opportunity Zones. Deferred capital gains receive a step-up in basis if held for at least five years, reducing the capital gains tax due. If the investor holds the investment in the Qualified Opportunity Fund for at least 10 years, he or she would be eligible for an increase in basis equal to the fair market value of the investment on the date the investment is sold or exchanged, resulting in no further taxation upon disposition.
Qualified Opportunity Zones provide a unique opportunity for investors who have capital gains and wish to establish a Qualified Opportunity Fund to invest in upcoming capital projects. Capital gains from the sale of real estate, stocks or art collectibles are eligible, as are other types of capital gains. Under the program, capital gains must be invested in the fund within 180 days from when they are realized. These funds are to be “self-certified” by the eligible taxpayer. Developers and investors with 2018 realized or potential capital gains should consider consulting with a tax attorney who can advise on establishing and self-certifying Qualified Opportunity Funds to take full advantage of these benefits.
Northeast Ohio is a prime area for developers and investors to capitalize on this program, with eligible census tracts in Downtown Cleveland, University Circle, the Health-Tech Corridor, the Near West Side, the Opportunity Corridor and several suburban Cuyahoga County locations.