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Qualified Opportunity Zones: An Introduction to New Opportunities under the 2017 Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 created new incentives for investment into certain communities throughout the United States that have been designated as Qualified Opportunity Zones (QOZs) by the U.S. Treasury Department. Recently, the Internal Revenue Service (IRS) and Treasury Department issued proposed regulations to clarify the rules regarding the mechanics of investing in QOZs via the establishment and operation of Qualified Opportunity Funds (QOFs).

The newly released regulations explain how investors can take advantage of the statute’s unique opportunity for deferral and exclusion of capital gains taxes by investing in designated distressed communities or QOZs. In doing so, it is important to understand what a QOZ is, know the mechanics of investing in QOZs via QOFs, and be aware of some of the opportunities—and the risks—that this new regulatory scheme presents.

Under the regulations, investors can defer tax on their invested capital gains for up to eight years, and can benefit from a 15 percent basis step-up along the way (i.e. only 85 percent of the original invested amount of capital gain would be subject to tax at year eight). Moreover, if investors wait to sell or exchange their investments until at or after 10 years, their basis gets stepped up to the fair market value of the investment at the time of the sale or exchange (i.e. additional gain attributable to the increase in the value of the QOF investment is not subject to tax).

The bottom line: these regulations create exciting new opportunities for individuals, businesses, and communities, compelling not just for the tax benefits, but also for the opportunity to do impact investing in local communities around the country; QOZs exist in every state and every major city has one or more QOZ.

© 2018 Schiff Hardin LLP

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About this Author

Matt Galo, Corproate Attorney, Schiff Hardin Law Firm
Partner

Matt Galo counsels private companies and their founders, investors and management teams in all aspects of their corporate activities, including formation and governance issues, capital raising, mergers and acquisitions, business counseling and negotiations, management issues, restructurings and transition. He serves as leader of our firm's Private Companies client service group.

In addition, Mr. Galo represents bank holding companies and other financial institutions in their mergers and acquisitions, including FDIC-assisted acquisitions of failed banks, as well as regulatory,...

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Robert Pluth, tax, attorney, Schiff Hardin, law firm
Partner

Robert R. Pluth Jr. represents taxpayers in connection with various federal and state income tax controversies, including complex tax accounting matters, tax shelters and transnational disputes.

312-258-5535
Associate

Rebecka has worked in a variety of practice areas including real estate, corporate compliance, government contracting of financial service products, general civil litigation, family law, and criminal appeals. She has also served as a judicial intern and law clerk in federal and state courts, and draws on this judicial experience in analyzing the best solutions for specific client issues. In addition, Rebecka draws on her background in linguistics when analyzing issues that arise concerning the development of legal language, particularly in the interpretation and...

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