Benefits of Opportunity Zones
Opportunity zone investment is a hot topic issue which has received a lot of press recently. Already, such investments are being used to develop properties all over Arizona. Because of this, you may have seen them mentioned in the news or on the internet and are now interested to see if the benefits of an opportunity zone investment would be right for you.
This post will explore what opportunity zones are and what incentives are available to those with long-term investing goals. Keep in mind however that the whole of the opportunity zone framework is quite complicated, and this post is intended to only give an overview of the topic.
What is the Purpose of the Opportunity Zone Designation?
At the highest level, opportunity zone incentives are intended to promote long-term investments in low income areas by offering tax deferment and a step-up in basis for capital gains. While the framework arises out of the 2017 Tax Cut and Jobs Act, the final version of the regulation is quite new, only having been released in December 2019.
What Are Opportunity Zones?
Opportunity zones are tracts of land within the United States which need reinvestment and economic stimulus. These tracts typically have lower income levels and higher poverty rates. For a tract to be designated an opportunity zone, a state’s government will first need to nominate the tract to the US Department of the Treasury. Treasury will then decide whether to designate the tract.
How Do I Invest in an Opportunity Zone?
You will invest your capital gains into a Qualified Opportunity Fund (Fund), generally within 180-days of your gain event. The Fund will then invest directly into a project, or will purchase ownership interests in a Qualified Opportunity Zone Business. The Business will then manage and develop the property. This process is involved and there are many further regulations of how a Qualified Opportunity Fund must maintain its standing. This topic will be discussed in a future post. Further, when one’s 180-day period begins to run depends on where the gain is coming from, whether from a pass-through entity like an LLC or otherwise. Lastly, COVID-19 has impacted the investment period time requirement for some individuals. Please consult with your tax or legal counsel prior to investing into any Fund.
What Are the Benefits of Investing?
The benefits to you are threefold:
- The first benefit of investing in a Fund is to defer paying the taxes on a capital gain event until the end of 2026. It is important to note however that if you sell your qualifying assets before this time, your deferral ends, and you will have to pay taxes on your gains without the other benefits listed below.
- The second benefit is the step-up in basis which occurs if you hold the Fund investment for a certain amount of time. The step-up comes at the five-year mark and you get a 10% step-up on basis. This means that you have until the end of 2021 to make your investment and still receive your step-up. While there was an additional 5% step-up available if you held the investment for 7 years, the time for this increase has passed due to the deferral period’s end in 2026.
- Third, and this is the big one, is that if you hold your investment for 10 or more years, you will not pay tax on new capital gain produced through your investment in a Fund. This means that if you invest in a development project for $50,000, and that asset is worth $60,000 in 2031, then you take that $10,000 gain tax free.
Can My Business Benefit from This Program?
Yes! Both individuals and corporations who have recent capital gains may invest those capital gains within 180 days into a Fund.
Please Note: While we hope that this post was informative, keep in mind that it merely scratches the surface of opportunity zone regulation and qualified opportunity fund investment. It is important that you consult with your tax advisors and legal counsel prior to making any investment decisions.