Opportunity Zones (OZs), established in 2017 and rapidly becoming a preferred investment strategy for individuals and companies, provide substantial tax benefits. Puerto Rico has almost completely been designated as an Opportunity Zone. One of the most notable policy changes in recent years is the Opportunity Zone Act and it has the potential to transfer billions of dollars into low-income or financially disadvantaged areas, according to Francisco De Armas-Cubas of Puerto Rico.
Establishing Opportunity Zones
Known as the Opportunity Zone Act, the Tax Cuts and Jobs Act of 2017 (TCJA) allows investors to delay some taxes on capital gains by investing in Opportunity Zones (‘OZ’). To be eligible for tax cuts, investments must be made in Qualified Opportunity Zone Funds or undertakings.
The Diverse Opportunity Zones of Puerto Rico
There are 863 designated OZs in Puerto Rico, including two added 2018 census tracts, 837 low-income areas, and 26 additional communities. The OZs are a mix of areas that are rural, semi-rural, and urban.
The Puerto Rico government reinforced current regulations in 2019 and made the concept of investing in a Puerto Rican OZ even more enticing. A new law entitled the Puerto Rico Incentives Code explained how capital gains produced from qualified OZ investments will be managed locally and tax credits for eligible investments would be issued.
How does investment in an Opportunity Zone work?
To self-certify what is known as an Eligible Opportunity Fund (‘QOF’), which is an investment vehicle that can be formed as a company or as a partnership, investors (individuals, families, or business interests) can file Form 8896. Each fund is obliged to keep at least 90% of its assets in a qualifying OZ region. Here’s how it operates:
Within 180 days of the sale delivering the capital gains or the date the capital gain is realized, the investor spends some or all of the capital gain by purchasing an ownership interest in a QOF.
In an eligible opportunity zone entity, the QOF invests 90% of its assets (QOZE).
QOZE invests at least 70% of its assets in a qualified business opportunity zone (QOZB).
The U.S. federal capital gain tax is postponed by the investor until the previous sale of the equity interest in the QOF or Dec. 31, 2026.
The investor can reduce the amount of the capital gain subject to US federal income tax on Dec. 31, 2026, depending on how long the investment is held:
When held for at least 10 years, the investor’s gain on the sale or swap of the equity investment in the QOF is excluded from U.S. federal income tax.