“Do well by doing good.” – Benjamin Franklin 

This sentiment has been incorporated as a strategic business model for most companies throughout the world. It is the concept that a company’s overall success is enhanced by giving back to society. It is in this spirit that the US government and the IRS created qualified opportunity zones (QOZ). QOZs were enacted into law by the Tax Cuts and Jobs Act on December 22, 2017, with the final Treasury Department regulations being published in the Spring of 2019. Qualified opportunity zones were established to encourage economic growth and create jobs in low-income or economically distressed communities. Investors must go through a qualified opportunity fund to invest in a QOZ, and by doing so can avoid taxes on the gain from the sale of a capital asset. The initial idea was the brainchild of Peter Thiel, a co-founder of PayPal and the first outside investor in Facebook. The initial bill that found its way onto the Tax Cuts and Jobs Act was originally coauthored by Congressmen Tim Scott (R-SC) and Cory Booker (D-NJ) and championed in the White House by Ivanka Trump.

Accordingly, the opportunity zone tax law (IRC §1400Z) is one of those unique manifestations in tax legislative history where both sides of the political spectrum have come together on a bipartisan basis to present investors with both a significant tax advantage (tax break) and an opportunity to reinvigorate targeted high-impact markets throughout the United States. The QOZ effectively shelters the gain from the sale of any capital asset from tax including the sale of stocks and bonds. This is a critical factor in the ability to reallocate a portfolio on a tax deferred basis from highly volatile and inflation exposed investments such as stocks and into non-corelated, stabilized, inflationary hedge investments such as real estate. This tax strategy was not available prior to 2018. A reallocation into alternatives would not have been possible without a substantial cut to the value of the investor’s financial portfolio either at long-term capital gain rates or short-term marginal tax rates. Thanks to this politically bi-partisan tax legislation, for the first time in American history, 100 percent of the cash proceeds from the sale of a stocks and bonds may be reallocated (if desired) on a fully tax deferred basis to alternative real estate investments to build a more diversified overall portfolio that hedges against inflation, is potentially less volatile, and provides tax sheltered income.

A qualified opportunity zone 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. The QOZ provision allows for a tax deferral on the gain from the sale of any capital asset if the gain amount is reinvested into a QOZ investment within 180 days of the sale. The type of capital assets that investors might sell for QOZ investment include real estate, stocks, bonds, art, bitcoin, and others. Furthermore, investors realize a full tax exclusion on any gains from the sale of the qualifying Opportunity Zone interest, if held for at least 10 years prior to the sale. QOZ investments provide a great incentivize for the investor to develop real estate and build businesses within opportunity zone areas designated by state governors bringing much needed infrastructure improvements and job creation to economically distressed communities.

Please also note that QOZ funds are available only to accredited investors. The Security and Exchange Commission defines an accredited investor as an individual with either greater than $1 million in net worth (excluding the equity in your principal residence) or net income for the last two years of $200,000 or greater ($300,000 if accreditation is for a married couple) with a reasonable expectation of such earnings in the current year.