As a result of the 2017 Tax Cuts and Jobs Act, Opportunity Zones have sprung up throughout the United States. However, because the IRS was slow to roll out regulations, there was little discussion about these zones until the latter part of 2018. Now with clearer guidelines, Opportunity Zone investing will likely have a significant impact on cities throughout the country, and they present a potentially significant tax benefit to investors—particularly those with high net worth.
Opportunity Zones are low-income, economically distressed land tracts that have been selected by municipalities and the state and approved as such by the U.S. government. More than 8,700 census tracts have received the Qualified Opportunity Zone designation, and throughout the country, large sums of money are being raised to invest in these zones. Many of these zones have already experienced the early stages of change. Look for these changes to accelerate. On the downside, these investments could also continue the gentrification of the neighborhoods where these zones are located.
The tax benefits associated with Opportunity Zone investing are meaningful and somewhat unique. To qualify for tax incentives, Opportunity Zone investments must be made through a Qualified Opportunity Fund (QOF), investment vehicles that can be established as a partnership or a corporation.
Certain restrictions apply to these funds. A taxpayer with a capital gain from most any type of investment can invest some or all of the gain into a QOF within 180 days of realizing the gain. The big distinction between this purchase and the traditional 1031 exchange is that the capital gain being invested can be almost any type of gain, not just real estate. These gains can be realized from the sale of a business or a publicly traded stock. Also, the taxpayer is able to defer paying tax on the gain until either the sale of the QOF or December 31, 2026, whichever comes first. Depending on the time of the investment, the taxpayer will then get a partial step-up in their original tax basis. Additionally, and maybe most significantly, there would be no tax on any gain from the QOF investment if held for at least 10 years.
Although somewhat complicated, the benefits can be substantial. It is more important than ever to properly vet the investment opportunities. Don’t just do it for the potential tax breaks. Investing in a QOF should fit appropriately in an overall financial plan, and it would be wise to consult a tax advisor.
In the next few years, the increased activity related to Opportunity Zones has the potential to further accelerate development around the U.S. Being educated on this topic will help investors recognize the potential for growth that this program presents.
For further information, contact your team at NNP. It’s best to act early since this investment will lose a portion of the tax benefit after December 31, 2019.