Established within the Tax Cuts and Jobs Act of 2017, the new Opportunity Zone legislation was created to develop economically-distressed communities across the United States by incentivizing long-term investments in these communities with tax benefits.
The intention of the Opportunity Zone program overall is to stimulate economic development and job creation in low-income communities. But unlike other programs, investors don’t get any upfront tax credits. Rather, they can reinvest their capital gains from other investments into these opportunity zones. Over time, they get preferable treatment on the profits from these new investments. After 10 years, additional capital gains are tax free.
3 Tax Benefits for Investing in an Opportunity Zone:
- A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Zone fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of, or December 31, 2026.
- A step-up in basis for capital gains reinvested in an Opportunity Zone. The basis is increased by 10% if the investment is held by the taxpayer for at least five years and by an additional 5% if held for at least seven years, thereby excluding up to 15% of the original gain from taxation.
- A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Zone fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Zone.
Eligibility Rules and Planning Strategy:
The program has many complexities surrounding organizational structure and choice of entity, but the eligibility rules to reap the tax benefits can be summed up as follows:
- The investor must realize eligible capital gain income (almost any capital gain income subject to a few exceptions);
- Within 180 days, the investor must reinvest the capital gain in an Opportunity fund; and
- More than 90% of the Opportunity fund’s assets must be in a qualified Opportunity Zone Property.
The deferred gain reinvested in an Opportunity fund must be recognized by the end of 2026. As a result, investors must invest in Opportunity funds by the end of 2019 to satisfy the holding periods.
Other Noteworthy Guidelines Surrounding Opportunity Zones
- Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia, and five U.S. territories. To see the list of Qualified Opportunity Zone locations, visit the . Department of the Treasury’s Opportunity Zones Resources.
- There are some restrictions regarding investments, such as casinos, golf courses, and massage parlors. Another forbidden investment is for financial companies that invest and lend as their core business.
- Small business growth is expected to stem from the Opportunity Zone program, as capital investors are now highly incentivized to make equity investments in impoverished communities.
- Opportunity Zone investments will benefit many large institutional funds, commercial real estate investors, and average accredited investors who will now have access to newly-formed Opportunity Zone fund investments.
While the Opportunity Zone program is rife with complex rules and guidelines, it cannot be overlooked that the tax benefits are substantial and attracting high net-worth individuals or individuals with capital gains.
Visit the IRS website for Opportunity Zones FAQs.
Contact a K·Coe Isom advisor for questions and guidance on capturing the tax benefits available through the Opportunity Zone program.