The 2017 tax reform reconciliation act (the Act), enacted December 22, 2017, includes a new tax incentive program, Internal Revenue Code Subchapter Z – Opportunity Zones, aiming to promote investments in certain economically distressed communities.
Through the opportunity zone program, investors are able to invest capital into low-income communities and promote long-term economic growth through a variety of investment vehicles, ie, stock, partnership interest and/or tangible business property. Investors may also receive significant tax benefits that include (i) tax deferral for capital gain invested in a qualified opportunity fund, (ii) elimination of up to 15% of the tax on the capital gain that is invested in the qualified opportunity fund, and (iii) potential elimination of tax when exiting a qualified opportunity fund investment. All of the underlying incentives relate to the tax treatment of capital gains, and all are tied to the duration of an investor’s stake in a Qualified Opportunity Fund, providing the most upside to those who hold their investment for 10 years or more.
To illustrate, assume that on June 20, 2018, a taxpayer sells property with a basis of $1,000,000 for $2,000,000, resulting in a capital gain of $1,000,000. If a taxpayer holds the investment in the Qualified Opportunity Fund (QOF) for at least 5 years, then the basis of such investment will be increased to 10% of the amount of gain deferred. Thus, if taxpayer in this example holds the investment in QOF for a period of at least 5 years, then his investment basis will be increased to $100,000 (10% x $1,000,000). If the investment is held by Taxpayer for at least 7 years, the basis is increased by an additional 5% of the amount of the deferred gain. Thus, after 7 years taxpayer's basis would increase to $150,000 [(10% x $1,000,000) + (5% x $1,000,000)]. Now if that investment is held for a period of at least 10 years, the basis of the investment could be equal to the fair market value of the investment on the date it is sold or exchanged.
What is a Qualified Opportunity Zone?
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