The Tax Cuts and Jobs Act—the sweeping tax reform law enacted in December 2017—has garnered significant attention for drastically lowering the corporate tax rate and expanding incentives for individuals and businesses. However, one lesser-known feature of the new tax law is the Investing in Opportunity Act, which established the Opportunity Zone program.
Created with the goal of attracting investment and stimulating job creation in economically disadvantaged communities, Opportunity Zones offer investors a powerful way to defer taxation on prior gains. The following frequently asked questions about Opportunity Zones will help investors take advantage of this widely beneficial new program.
What are Opportunity Zones?
The Investing in Opportunity Act allowed state governors across the U.S., as well as the mayor of Washington, D.C., to nominate low-income census tracts within their jurisdictions for designation as Opportunity Zones. These nominations were then reviewed and certified by the U.S. Treasury. Currently, there are approximately 8,700 Opportunity Zones in urban and rural communities across all 50 states, Washington, D.C., and five U.S. territories.
What are Opportunity Funds?
Qualified Opportunity Funds (QOFs) are partnerships or corporations that have been set up to facilitate investment in eligible property located within Opportunity Zones. Eligible property includes business property, newly issued stock or partnership interests in a Qualified Opportunity Zone business, and real estate that is either new construction or has been substantially improved. Certain “sin” businesses, including country clubs, liquor stores, and gambling facilities, may not be eligible. A minimum of 90 percent of a QOF’s assets must be held in Opportunity Zone property. QOFs may self-certify without approval from the Treasury Department, and they are administered by fund managers as opposed to government agencies.
How can investors benefit from investing in Opportunity Zones?
The Opportunity Zone program allows taxpayers to defer taxation on gains from the sale of stock, real estate, collectibles, businesses, and other assets by investing those gains (within 180 days of realizing them) in a QOF. Investors do not need to live or work in Opportunity Zones in order to participate. Since the goal of the Opportunity Zone program is to incentivize long-term investment in struggling communities, investors accrue greater tax benefits the longer that QOF investments are held:
- If a QOF investment is held for fewer than five years, the only benefit to investors is that they will be able to defer payment of existing capital gains taxes until the date when the QOF investment is sold or exchanged.
- If the investment is held for five to seven years, investors will be able to defer payment of taxes until the investment is sold or exchanged, and will receive a ten percent exclusion of taxes on the existing capital gain.
- If the investment is held for seven to ten years, investors will be able to defer payment of existing capital gains taxes until December 31, 2026, or the date when the QOF investment is sold or exchanged—whichever comes first. In addition, fifteen percent of the existing capital gains taxes will be canceled.
- Investors receive the greatest tax benefits when the QOF investment is held for more than ten years. In addition to receiving the same benefits as when the investment is held between seven and ten years, investors will qualify for an increase in basis equal to the investment’s fair market value when it is sold or exchanged. This allows investors to avoid paying any capital gains tax on the appreciation of assets held in the QOF.
By allowing investors to defer and reduce hefty capital gains tax liabilities, the Opportunity Zone program offers an attractive way to maximize returns on investments—while advancing the important societal goal of stimulating growth in economically distressed communities.
Interested in learning more about the tax savings opportunities of investing in a QOF? Now is the time to act! Contact CRG today to schedule a pro bono analysis.
(Sources: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions, https://ofn.org/sites/default/files/resources/PDFs/Opportunity_Zone_fact_sheet.pdf, https://fundrise.com/education/blog-posts/what-are-opportunity-zones-and-how-do-they-work).