Opportunity Zone Funds
The Tax Cuts and Jobs Act of 2017 offers an radical tax break to investors.
3 Key Benefits
- Temporary deferral of taxes on previously earned capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or when the asset is disposed of.
- Basis step-up of previously earned capital gains invested. For capital gains placed in Opportunity Funds for at least 5 years, investors’ basis on the original investment increases by 10 percent. If invested for at least 7 years, investors’ basis on the original investment increases by 15 percent.
- Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).
Defer Capital Gains Tax
Investors in the stock market have done particularly well since the recession. The S&P 500 nearly tripled between 2009 and 2016. The Dow Jones Industrial Average rose more than 140 percent between 2009 and 2017. Investors are sitting on significant unrealized capital gains that could go a long way toward jump-starting communities. Enough incentive to attract the first investor or developer into a distressed area, which becomes a tipping point for additional investment. Under the program, an investor can defer capital gains tax on realized gains if the gains are invested in a Qualified Opportunity Fund within 180 days of the sale.
Twelve percent of US census tracts are Opportunity Zones (8,762 tracts). Governors of the 50 states and 4 territories and the mayor of Washington, DC, nominated the zones, which were officially designated by the US Department of the Treasury. The designated zones have lower incomes, higher poverty rates, and higher unemployment rates than eligible non-designated tracts.
Adjusted Reduced Tax Basis
Initially, the tax basis is deemed to be zero. However, if the Opportunity Fund investment is held for at least 5 years, the basis is increased to 10 percent of the deferred gain. Holding the investment for at least 7 years, the basis is increased to 15 percent of the deferred gain. Finally, if the Opportunity Fund investment is held past December 31, 2026, the investor will be deemed to realize the deferred capital gains as of December 31, 2026. In addition, will pay capital gains tax on the amount of recognized gains as of that date (determined as described above, with basis adjustments if applicable).
The basis is then adjusted to equal the amount of the original Opportunity Fund investment. Finally, if the investor holds the Opportunity Fund investment for at least 10 years, the basis is deemed to be the fair market value of the Opportunity Fund investment and no capital gains tax will apply to the appreciation on the Opportunity Fund investment.
