Opportunity Zones

Qualified Opportunity Zones

The tax overhaul bill that was passed in late 2017 garnered a great deal of attention for it’s changes to the tax treatment of real estate, along with other asset classes. What got less attention (at least initially) was the bill’s Investing in Opportunity Act, which established the new Opportunity Zone program, consisting of Opportunity Zones and Opportunity Funds.

What is an Opportunity Zone?

According to the Internal Revenue Service (IRS) an Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service

How does Opportunity Fund Investing Work?

An investor who has triggered a capital gain by selling an asset like stocks or real estate can receive special tax benefits if they roll that gain into an Opportunity Fund within 180 days. There are three primary advantages to rolling over a capital gain into an Opportunity fund:

1) Defer the payment of your capital gains until Dec 31, 2026.

2) Reduce the tax you owe by up to 15% after 7 years.

3) Pay Zero tax on gains earned from the Opportunity Fund.

What are the Tax Advantages of Opportunity Zones?

Deferral of capital gain

A tax deferral for any capital gains rolled over in an Opportunity Fund. The deferred gain would be recognized on the earlier of December 31, 2026 or the date on which the investment in the Fund is sold.

Reduction of the capital gains tax realized

A step-up in basis for capital gains rolled into an Opportunity Fund. The basis of the original investment is increased by 10% if the investment is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years. In other words, if by December 31, 2026 an investor has held an investment in an Opportunity Fund for 7 years, then the tax on the initially deferred gain is expected to be reduced by 15%, or reduced by 10% if by then held for only five years.

No tax on any capital gains from an investment in Opportunity Fund

In the case of any investment in an Opportunity Fund held by a taxpayer for at least 10 years, the basis of such property shall be equal to the fair market value of such investment on the date that the investment is sold or exchanged. In short, after 10 years, thereafter there would be zero federal capital gains tax on profits from the sale of an investment in an Opportunity Fund.