Created in 2017 and quickly becoming a preferred investment strategy for individuals and corporations, Opportunity Zones (OZs) offer significant tax benefits. Puerto Rico has been designated almost in its entirety as an Opportunity Zone. The Opportunity Zone Act is one of the most important legislative developments in recent years and has the potential to move billions of dollars into low-income or financially distressed communities.
The Tax Cuts and Jobs Act of 2017 (TCJA), known as the Opportunity Zone Act, allows investors to defer certain capital gains taxes by investing in Opportunity Zones (“OZ”). Investments must be made in Qualified Opportunity Zone Funds or businesses to be eligible for tax breaks.
Puerto Rico has 863 designated OZs, including two census tracts added in 2018, 837 low-income communities, and 26 additional communities. The OZs are a combination of rural, semi-rural, and urban areas.
In 2019, the government of Puerto Rico strengthened existing laws and made the idea of investing in a Puerto Rican OZ even more appealing. A new law entitled “the Incentives Code of Puerto Rico” clarified how capital gains generated from qualified OZ investments would be treated locally and provided tax credits for eligible investments.
Investors (individuals, families, or business interests) can file a Form 8896 to self-certify what is known as a Qualified Opportunity Fund (“QOF”), which is an investment vehicle that can be structured as a corporation or as a partnership. Each Fund is required to hold a minimum of 90% of its assets in a qualifying OZ area. Here is how it works:
•The Investor invests some or all of the capital gain by acquiring an equity interest in a QOF within 180 days of the sale generating the capital gains or the date the capital gain is realized.
•The QOF invests 90% of its assets in a Qualified Opportunity Zone Entity (QOZE).
•The QOZE invests at least 70% of its assets in a Qualified Opportunity Zone Business (QOZB).
•The Investor defers the U.S. federal capital gain tax until the earlier of the sale of the equity interest in the QOF or Dec. 31, 2026.
•Depending on how long the investment is held, the Investor may reduce the amount of the capital gain subject to US federal income tax on Dec. 31, 2026:
•The investor’s gain on the sale or exchange of the equity investment in the QOF is exempt from U.S. federal income tax if held for at least 10 years.