Are Opportunity Zone Investments Subject to Alternative Minimum Tax (AMT)?

If there’s one thing that’s for certain, you can’t escape taxes. To make sure individuals don’t take advantage of too many tax loopholes and at least pay a minimum amount of tax, the U.S. government placed a floor on the percentage of taxes that a taxpayer must pay to the government, known as the alternative minimum tax, or AMT.

There are certain situations that may trigger AMT, such as high household income and realizing a large capital gain. A question that often comes up is whether Opportunity Zone investments are subject to the alternative minimum tax. 

Opportunity Zone investments can provide investors with some substantial tax benefits. You can potentially benefit from temporarily deferring capital gains, a step-up in basis, or a permanent exclusion on long-term holdings. Opportunity Zones may be worth exploring, but you should be aware of any potential obligations that come with this type of investment. 

What Is an Opportunity Zone?

Created by the Tax Cuts and Jobs Act of 2017, an Opportunity Zone is a tax incentive for investors to reinvest their capital gains into certain designated areas, known as Qualified Opportunity Zones (QOZs). Investors can defer, reduce, or even possibly eliminate tax liability on capital gains by investing in these economically distressed areas for an extended period of time. 

There are thousands of communities in all 50 states, the District of Columbus, and five U.S. territories. The investment can be any number of things, from commercial office buildings to multi-family housing to industrial buildings. 

Understanding the Alternative Minimum Tax 

There are many tax benefits that can significantly reduce someone’s tax liability. The alternative minimum tax applies to high-income taxpayers by placing a limit on these benefits. By limiting certain tax breaks, it ensures that certain taxpayers at least pay a minimum amount of income tax. 

The AMT has two tax rates: 26% and 28%, depending on where the taxpayer’s income falls in the AMT threshold. Once your adjusted gross income hits the exemption level, the AMT is mandatory. 

What Triggers the Alternative Minimum Tax?

Here are some of the most likely scenarios that would trigger the AMT:

• High household income. Once your household hits the phaseout threshold $1,047,200 for married filing jointly and $523,600 for individuals) plus you have a certain number of itemized deductions, you could be hit with the AMT.

• Realizing a substantial capital gain. Realizing a capital gain could be enough to put you over the AMT exemption threshold. 
• Exercising stock options. Even though exercising qualified employee stock options to buy stock isn’t a taxable event until shares are sold, the AMT creates a paper profit, which is taxable. 
  
  

Are Opportunity Zone Investments Subject to AMT?

While the TCAJA created Opportunity Zone investments, it also repealed the corporate AMT for all C corporations for tax years beginning after December 31, 2017. Because of how OZ investments are structured, the AMT may not apply.

Any corporation or individual can take their unrealized gains and invest them into Qualified Opportunity Zones. However, assets must be placed in a Qualified Opportunity Fund, which is an investment vehicle used to invest in Opportunity Zones. 

Opportunity Funds can be structured in several ways but are generally structured as a partnership or corporation. This partnership or corporation is what holds the property located in the Opportunity Zone, making them exempt from the alternative minimum tax.