In December of 2017 Congress passed the Tax Cuts and Jobs Act of 2017. A significant piece of the legislation created incentives for investment in low income communities called Qualified Opportunity Zones (QOZ). Self storage investors were clearly potential beneficiaries of the legislation but up until recently details of the incentives were scarce. On October 19th, 2018, the IRS provided their initial guidance on the legislation which outlines the significant tax advantages self storage investors can qualify for.
How to qualify
To qualify for the tax incentives an investor must meet certain criteria.
- Only capital gains can be deferred, not ordinary income
- Capital gains can come from any taxpayer including a REIT
- All capital gains are eligible assuming they would be otherwise recognized
- Capital must be invested in a QOZ property within 180 days of sale (31 months if a written plan consistent with ordinary business is in place and the business complies with it)
Qualified Opportunity Fund (QOF) requirements:
- Self certify using Form 8996 (only draft available)
- QOFs must invest 90% of their assets in a QOZ property
- Eligible interest in QOF must be equity
- Must be purchased after December 31st, 2017
- Must be purchased in a QOZ
- The original property use in the QOZ commences with the QOF or the QOF substantially improves the property
Details of the criteria and edge cases can be referenced in the IRS guidance documentation.
The benefits of investing in a QOF
The primary reason for investing capital gains in a QOF is to defer capital gains tax until December 31st, 2026 or the sale of the QOF investment; whichever comes first. By deferring capital gains tax investors can increase their purchasing power in the QOF investment. If the investor holds on to QOF investment for 5-10 years they can further benefit by reduction in certain capital gains.
QOF investment held for:
- 5 Years – investor may exclude 10 percent of the deferred gain from income
- 7 Years – investor may exclude 15 percent of the deferred gain from income
- 10 Years – gain on the qualifying investment in the QOF may be excluded from income
Where can I find a QOZ?
QOZ are economically distressed communities nominated by the state and certified by the Secretary of the U.S. Treasury. We have loaded all the zones into Radius so that users can quickly identify and analyze properties in these zones. For help on how to use this feature check out the video below.