The Tax Cuts and Jobs Act, P.L. 115-97 (Dec. 22, 2017) (Tax Act), created a new economic development vehicle with tax deferral and tax abatement (“qualified opportunity zones or QOZ”). QOZ provides a deferral mechanism for short- and long-term capital gains for current investments in nearly all asset classes. A QOZ provides (1) the ability to invest only the gain rather than the principal of a current investment; (2) a broad range of investments eligible for the deferral; (3) a potential basis step-up of 15 percent or substantially more of the initial deferred amount of investment; and (4) an opportunity to eliminate taxation on capital gains post-investment.

A QOZ generally must be a population census tract within a state that qualifies as a low income community as defined under Section 45D(e) of the Internal Revenue Code (Code). To qualify as a low income community (LIC), a population census tract must have a poverty rate of no less than 20 percent, or a median family income not to exceed 80 percent of either the statewide or metropolitan area income, depending on the tract’s location. A tract that is not an LIC but is contiguous to an LIC that is designated as a QOZ (even if not in the same state) and has a median family income not exceeding 125 percent of the median family income of such LIC may also be designated as a QOZ. The total number of non-LIC tracts that are designated as QOZs in a state cannot exceed five percent of the total number of designated QOZs in such state.