The Opportunity Zones Program was created to attract investments and generate economic development in low-income communities, known as Qualified Opportunity Zones. Here you can learn more about what an Opportunity Zone is, how to get the most out of your capital profits, and what type of investment activities are eligible.
I. What is an Opportunity Zone?
An Opportunity Zone is an economically-deprived community where new investments may be eligible for a preferential tax treatment. The communities are certified as Opportunity Zones by the United States Treasury Secretary through the IRS. Puerto Rico is an attractive place for investments because 98% of the island was designated as an Opportunity Zone (Act 21-2019, known as "2019 Puerto Rico's Opportunity Zones and Economic Development Act").
II. How does an investor benefit from investing in Opportunity Zones?
The eligible taxpayer can go without paying taxes on their profit if the taxpayer has an eligible profit and invests it in a Qualified Opportunity Fund. A Qualified Opportunity Fund (QOF) is an investment vehicle that was created to invest in Qualified Opportunity Zones. In just 10 years, the taxpayer can be fully exempt from taxation on their investments in a QOF. Note that the deferred earnings should be recognized before December 31, 2026.
Here is a brief overview of the deferral and exclusion of capital profits:
5 years: If the investment in a QOF is maintained for 5 years, the investor will tribute for the 90% of capital earnings invested in the QOF.
7 years: If the investment in a QOF is maintained for 7 years, the investor will tribute for the 85% of the capital earnings invested in the QOF.
10 years: If the investment in a QOF is maintained for 10 years, the earnings generated will be totally exempted from taxation.
III. What is considered an eligible activity?
An eligible activity is a Priority Project in Opportunity Zones.
- Priority Projects such as development activities for sale or rent - Examples: affordable housing, residential or commercial property, industrial use property, substantial improvement of existing projects for commercial use
- Eligible business activity done completely in an Eligible Zone and carried through the QOF
- Other economic activities that request to be approved as a Priority Project by writing a letter of application to the Priority Projects in Opportunity Zones Committee
Book your tax consultation with me to learn more about how you can be exempt from taxes on your capital profits