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Nonprofits: Leverage a Qualified Opportunity Zone Fund to Further Your Mission

By Jack Abdo, CPA

When the Tax Cuts and Jobs Act (TCJA) was signed into law, it created an opportunity for individuals and businesses to defer tax on capital gains through the use of Qualified Opportunity Zone Funds (QOZFs). Since then, the Internal Revenue Service has issued clarifying guidance regarding QOZFs, and tax professionals are seeking to understand it so they can spread the word to clients who could benefit from them. However, one aspect has remained crystal clear: QOZFs could give your donors a tax-advantageous way to invest their long-term capital gains while helping to further your mission.

First, a quick background:

What is a Qualified Opportunity Zone Fund?

A QOZF is an entity that invests in an eligible property within the bounds of a Qualified Opportunity Zone (QOZ). A QOZ is a state-designated geographical area. This map shows the locations of QOZs across the U.S (Zoom in for specifics).

The most important thing to know about QOZFs is that they provide a range of tax benefits, particularly to wealthy investors who have large amounts of capital gains and can hold their QOZF investments for at least 10 years. (You can learn more about QOZFs here.)

What does this mean for your nonprofit?

If your nonprofit is looking to acquire a building or facility within a designated QOZ, consider a QOZF. If your nonprofit were to create one, it could give you a way to acquire the property while also providing donors with a desirable tax benefit.

Let me (briefly) explain...

You can create a QOZF by partnering with a donor (or donors) to acquire property in a designated QOZ. For many nonprofits, especially those that serve economically distressed neighborhood, this may align perfectly with their existing facilities strategy.

For instance, say an individual donor has $1 million of unrealized capital gain. If the donor invested the gain in a QOZF property, held it for 10 years and then sold it, not only would the tax on the original capital gain be deferred for eight years and at that eight year mark pay capital gain tax on only 85% of that original capital gain but also the donor would not have to pay tax on the realized gain of the sale QOZF property. Or, if the donor chose to donate the property to your nonprofit after 10 years instead of selling to a third party, the donor would receive a donation deduction of the property's fair market value, resulting in additional tax savings.

In either scenario, the donor could lease the building to your nonprofit, so you could get into the building at an affordable rate. The donors would collect rent, and would have a plan to either sell or donate the building back to your nonprofit.

The sooner you consider a QOZF, the better.

Per the TCJA, taxpayers have until 2020 to reap the full tax benefits of investing into a QOZF—which means it's prudent to explore your options as soon as possible. Furthermore, a taxpayer has only 180 days from the date of the previous sale to make an investment into a QOZF. Establishing a QOZF fund gives your donors an avenue for investing gains they may have realized in the latter half of 2018—while also helping your organization further its mission.

If you'd like to learn more about leveraging a QOZF in your facilities strategy, give us a call today.