Unlocking the Tax Benefits of Opportunity Zones
Dec 10, 2019
Are you interested in reviving economically distressed communities in your area and reducing your tax burden at the same time? The Opportunity Zone program, created by the Tax Cuts and Jobs Act of 2017, provides the opportunity to do both.
What is an Opportunity Zone?
It is an economic development tool aimed to attract investments and jump-start economic growth in low-income urban and rural communities nationwide. To view all qualified opportunity zones, visit the U.S. Department of the Treasury for the most up-to-date listings. Zones are identified by state, county, and census tract number.
How does the program work?
It permits investors (individuals, corporations, partnerships, trusts & estates) to defer tax on any prior capital gains made from the sale or exchange of any asset, only if they invest in a Qualified Opportunity Zone (QOZ) by way of a special purpose entity known as a Qualified Opportunity Fund (QOF) within 180 days after the gain arises. In short, a QOF is an investment vehicle designed to hold funds to then invest in real estate to make “substantial improvements”.
What are the tax benefits?
- Deferral of taxable gains as late as December 31, 2026
- Qualifying investments made by December 31, 2021, and held until 2026 are eligible for a reduction in deferred gains in the amount of 10% of the gain. Investments made by December 31, 2019, and held until 2026 are eligible for an additional deferred gain reduction of 5% for a total maximum gain reduction/basis step-up of 15%.
- Permanently exempts any future gains of reinvested proceeds. Gain from appreciation in the QOF investment may be eliminated if the QOF investment is held for at least 10 years.
What should I know before investing?
Your original deferred gain (less any amount forgiven) will be subject to tax on whichever date comes first: either December 31, 2026, or when you sell your interest in an Opportunity Zone Fund. If you still own the interest in an Opportunity Zone Fund after December 31, 2026, you will owe tax on the original deferred gain without any cash proceeds from the investment to pay the tax.
When do I need to invest?
Act fast! Investing by December 31, 2019, will ensure you capture the greatest tax benefit.
Tax Senior Manager
Categories: Tax Planning