Opportunity Zones

 

 

What are Opportunity Zones?

The Opportunity Zones incentive is a new economic development tool established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. They are designed to spur economic development and job creation in distressed communities.

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What are the Benefits of Opportunity Zone

Opportunity Zones provide a tax incentive for investors to re-invest their unrealized capital gains into dedicated Opportunity Funds.

The program essentially rewards reinvestment of profit into “Opportunity Zones” defined as low-income census tracts selected by state governors and certified by the U.S. Treasury Department. You have 180 days from the sale of your assets to invest into a qualified Opportunity Zone Fund.

In order to qualify, gain must be from an “unrelated” party sale or exchange of property, and investment of such gain must be made within 180 days of the sale or exchange of property.

First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF)* until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.   If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain.  If held for more than 7 years, the 10% becomes 15%.  

Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.

*A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible properties that is located in a Qualified Opportunity Zone.

 

Hypothetical Example:

Investor sells $2M of Google stock, with $1mill Capital Gain:

  1. Invest $1M into OZ Fund
  2. After 5th year their basis is reduced by 10% to $900K
  3. After 7th year their basis is reduced another 5% to $850K so now they only owe capital gains on $850K not $1M; capital gains are required to be paid in year 2026
  4.  Investment grows from $1M to $3M; they owe NO taxes on the $2M gain from the OZ Fund Investment if they hold the investment for +10 years