Global Tax Insights
Opportunity Zones: Invest in your Community while Saving TaxDecember 13, 2019
Investors, the TCJA includes a provision to help you avoid capital gains tax on your investments…and time is running out to make the most of this provision! Here’s what you need to do before December 31st.
*Editor’s Note: This blog was originally posted August 28, 2018 but has been updated as of December 13, 2019 for accuracy and comprehensiveness.
Investors, time is running out to make the most of opportunity zone investments! To qualify for the maximum 15% of forgiveness offered under the tax code, the investment must be held for seven years before the end of 2026. Hence, investors have just a couple weeks left to make the investment before December 31, 2019.
More about opportunity zones
The Tax Cuts and Jobs Act (TCJA) introduces a new investment vehicle called Opportunity Funds which help direct resources to low income communities, known as Qualified Opportunity Zones, to help investors avoid capital gains tax.
If you designate capital gains towards investing in an opportunity zone, you may be able to defer or eliminate the tax that would come with the sale of your current investments.
Opportunity zones are designed to spur economic development and job creation in struggling communities. Governors in every state designate opportunity zones that are deemed economically distressed, so investments in these zones are potentially eligible for preferential tax treatment.
Investing in opportunity funds to support opportunity zones can provide many incentives:
- Capital gain deferral
- Potential reduction of the amount of gain realized through a basis adjustment
- Potential permanent gain exclusion of the appreciation
There is no cap on how much money can be invested in opportunity zones.
So what can you invest in?
There are a number of potential qualifying investments within physical boundaries of the zone – It can be a business or a real estate project, as long as it is in the deemed zone. The fund must hold at least 90 percent of its assets in Qualified Opportunity Zone Property, which includes stock, partnership interest, or business property obtained after December 31, 2017.
For the average investor looking to shelter capital gains, real estate would likely be the easiest investment. The investor would need to designate the gains towards the new investment and set up a fund to hold it (such as segregating it in an LLC).
A savvy investor could also invest in a business such as a restaurant or supermarket in a neighborhood. Syndicated funds can be invested in for large scale recovery projects with little work (for qualified investors).
Investors don’t get upfront tax credits by investing in opportunity zones. Rather, under Code Section 1400Z, Special Rules for Capital Gains Invested in Opportunity Zones, investors can reinvest their capital gains from other investments into these zones. As time goes by, investors get preferable tax treatment on the profits from these new investments, and after 10 years, additional capital gains are tax free.
Is there a list of qualified opportunity zones available?
Yes—the IRS site has a list that is periodically updated with all available opportunity zones. You can access it here https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx
December 31st Deadline
Need help getting started with an OZ investment before December 31st? We can help.
Also, if you are a partner in a partnership, you may want to determine if there will be any capital gains allocated to you from the partnership. If so, you would be able to defer that gain and receive the maximum opportunity zone tax benefits if an investment is made exactly on 12/31/19 (the first day that the taxpayer is eligible to reinvest the gain).
What if I miss the December deadline?
If you do miss this deadline, you can still qualify for the 10% forgiveness on investments held for at least five years by the end of 2026.
Interested in investing in opportunity zones? The regulation is still relatively new, so you’ll want to consult your tax advisor for advice.
Questions? Contact us today.