OZ MAGAZINE 2022 Top 25 Influencers issue 2.2 | Page 90
90 OPPORTUNITY ZONE MAGAZINE | ISSUE 2 • VOLUME 2
REAL OPPORTUNITIES OUTSIDE REAL ESTATE : USING THE OPPORTUNITY ZONES INCENTIVE FOR OPERATING BUSINESSES
By Paul J . Valentine
How operating businesses can meet the Qualified Opportunity Zone Business requirements .
The Qualified Opportunity Zone Investment Program was designed in part to encourage investment in rural and lowincome communities . The plan was to allow the deferral of capital gains to stimulate traditionally undercapitalized areas . Yet most Qualified Opportunity Funds focused on real estate and in particular new construction . This type of investment may not have resulted in anticipated benefits to the community . However , this focus was understandable . Deferring 1 gains in real estate investments has been a tried and tested strategy for many years and when the QOZ program added potential step ups in basis after five , seven , and 10 years , the QOZ program was a concept that was comfortable for many real estate investors . Hence , the initial wave of QOZ funds weighed heavily on real estate projects . Yet as the program continued , many questioned whether the incentive achieved its goal of driving capital into poor , urban and rural areas that traditionally lacked long-term investment . Perhaps , one reason for this tension is that so far , many opportunity zone investors have overlooked the full breadth of the QOZ program . By focusing solely on real estate investments , potential investors have missed a different investment ( with albeit higher risk ) that can generate potentially higher returns : investing in an operating business as a Qualified Opportunity Zone Business .
OPPORTUNITY ZONE BENEFITS
The QOZ program provides three tax benefits : ( 1 ) deferral of tax until December 31 , 2026 , or the sale or exchange of the opportunity zone investment ( Deferral Benefit ); 2 ( 2 ) a basis step-up of 10 % if the investment is held for five years with an additional 5 % if the investment is held for seven years ( Step- Up Benefit ); 3 and ( 3 ) upon sale of the interest , investors do not need to pay tax on the appreciation if the opportunity zone investment is held for at least 10 years ( Exclusion Benefit ). 4