Is There a Better Alternative to Qualified Opportunity Zone Investments?
In this article, we look at Qualified Opportunity Zone Fund (QOZF) investments, and how Malta Pension Plans (MPP) offer added incentives in terms of tax-saving potential.
What is a QOZF?
When the Tax Cuts and Jobs Act (TCJA) was passed in December 2017, the new legislation created Qualified Opportunity Zone Funds. The intention was to incentivize US taxpayers to invest capital gains in the development of economically distressed areas throughout the United States.
TCJA effectively enables taxpayers with capital gains to defer their tax liability until 2026 if they invest in a QOZF. The taxpayer has 180 days from the sale or exchange of appreciated property to invest any realized gains in a QOZF.
Nominated by individual states, Opportunity Zones must receive certification from the US Treasury Department in order to qualify for the program. By June 2018, Opportunity Zones had been certified in all 50 US states; there are now approximately 8,700 recognized nationwide. The term “Qualified Opportunity Zone Fund” incorporates any investment vehicle with a minimum of 90% of its assets invested in Qualified Opportunity Zone Property.
The TCJA legislation confers benefits to QOZF investors maintaining ownership for certain milestones. For example, if investors retain a QOZF investment for a minimum of 5 years they earn a 10% step-up in tax basis, increasing to 15% after 7 years. If the investment is held for 10 years or more, appreciation on the investment over that 10-year period is effectively tax-free.
What is an MPP?
Executed in 2008 and effective since 2011, the US-Malta Income Tax Treaty provides that all or part of income or gains earned through a Malta Pension Plan (MPP) are effectively exempt from taxes in the United States. Investments in an MPP may be made in non-monetary form — for example, real estate or business interests that produce active income may be invested into an MPP directly without being liquidated first.
In terms of tax deferrals, an MPP is a powerful vehicle, with benefits far exceeding the traditional Roth IRA. MPPs are not constricted by prohibited transaction rules or contribution limits. At distribution, a significant portion of the deferred income may be paid out without incurring taxes, either in Malta or the United States.
An MPP therefore makes an effective long-term tax deferral vehicle, with none of the obstacles of complicated tax hurdles like Unrelated Business Taxable Income (UBTI) rules or contribution limits.
What are the main benefits of an MPP versus a QOZF Investment?
Essentially, a QOZF investment is extremely specialized — it requires investment of capital gains into a specially designated Qualified Opportunity Zone tied to a specific geographic area. In contrast, investments in MPPs can be made in non-cash form, including real estate and business assets, without the need for liquidation.
QOZF investments have favorable tax advantages only for capital gains invested into the fund within 180 days of the sale or exchange of the property. An MPP investment grows tax-free, without incurring US federal taxes, even on distribution.
Moreover, the time constraints that apply to QOZF investments aren’t applicable with MPPs. Capital gains from an MPP investment are tax-free without regard to the investment’s age. Overall, the time horizon with an MPP is more flexible and allows the investor to customize a strategy according to their retirement plans.
