Trillions of dollars in long-term capital may soon be making its way into distressed rural and urban communities hungry for opportunity. The vehicle for change is a new tax-advantaged program that encourages investment in needy neighborhoods.
Enacted by the 2017 Tax Cuts and Jobs Act, the Opportunity Zone program gives investors a tax break on unrealized gains from the sale of highly-appreciated assets (stock, mutual funds, and real estate) if the profits are reinvested in an Opportunity Fund that in turn, invests in businesses and real estate in designated communities. The tax incentive is the deferral, reduction or elimination of certain federal capital gains taxes.
By linking investors to investment opportunities through Opportunity Funds, this market-based model is expected to pump new life into under-served areas throughout the nation.
Opportunity Funds are a chance for private investors to deposit capital gains into projects aimed at rebuilding distressed communities. Taxes on the capital gains are deferred by investment.
Investors that deposit capital they wish to defer into Opportunity Funds benefit from significant tax benefits.
- Any deferred capital gains would be reduced by 10% after five years and an additional 5% after seven years in the fund, for a total potential reduction of 15%
- Any appreciation on investments (new gain) held for 10 years or longer is not taxed
- Taxes on the original deferred gain, less any reduction earned by being in the investment for five or seven years, must be realized by 2026
Investors also benefit from knowing they are helping to revive struggling rural and urban economies.
Short window of opportunity
Policymakers are expected to clarify some of the finer points in the law. But one point unlikely to change is the window of opportunity to invest, which sunsets in 2026.
If you are a taxpayer with large capital gains in 2018 or in the future, let’s sit down and see whether these investments might be a good fit for you.
Interested in learning more about Opportunity Funds and historic preservation investments? Click here to contact us and let us know. For more information, see the IRS Opportunity Zones Frequently Asked Questions.