New Opportunity Zone Investments
A new tax incentive, called Opportunity Zones, was added to the tax code as part of the Tax Cuts and Jobs Act passed in December of 2017.
The Opportunity Zone is a new investment vehicle created by Congress in the most recent overhaul of the tax code. The Opportunity Zone Funds are investments in targeted, designated low-income areas of the country where it is determined that resources should be directed to help with job creation and economic revitalization.
The investment of funds in these Opportunity Zones is eligible for significant tax incentives:
- Capital gain deferral
- Potential reduction of gain through a basis adjustment
- Potential permanent gain exclusion on the appreciation for the interest in a Qualified Opportunity Fund
A simplified version of how this investment works is as follows:
- Taxpayer sells a capital asset with a capital gain. At the taxpayer’s election, they defer the gain and invest the gain in a Qualified Opportunity Fund within 180 days of the sale of the capital asset. A Qualified Opportunity Fund is any investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property.
- If the taxpayer holds the Qualified Opportunity Fund investment for five years, they receive a basis increase in the investment equal to ten percent of the deferred gain they invested in the fund.
- If the taxpayer holds the Qualified Opportunity Fund investment for two additional years, they receive additional basis equal to five percent of the gain they deferred to invest in the fund.
- If the investor still holds the fund on December 31, 2026, they are required to recognize and pay taxes on the deferred gain (less the basis increases they may receive if they hold the investment for the five and seven year intervals).
- If the investor continues to hold the investment past December 31, 2026 (and for a total of ten years), they receive a step up in basis of their investment equal to fair market value.
If the investor meets all the requirements and holds the qualified investment for the ten-year period they avoid all gain on any appreciation in the investment.
Click here to view the Internal Revenue Service FAQ page setup to answer questions on this new tax incentive.
The application of the new Opportunity Zone investment rules is very complicated so please consult with your professional tax advisor if you have questions on these rules.