On December 22, 2017, the Tax Cuts and Jobs Act created a new section of the Tax Code that provides tax incentives for investments in targeted areas in the United States through investment vehicles called Opportunity Funds. The purpose of Opportunity Funds is to promote economic development in select communities, known as Opportunity Zones, by offering investors substantial federal tax advantages that are only available through the program.
Opportunity Zones are economically distressed communities nominated by governors and certified by the U.S. Department of the Treasury into which investors can invest in new projects intended to spur economic development in exchange for certain federal tax benefits. Opportunity Funds are investment vehicles that invest at least 90% of their capital in qualified Opportunity Zones. The fund enables investors to pool their resources in Opportunity Zones, increasing the scale of capital investments selected by the manager.
To reap the tax benefits offered by an Opportunity Fund, an investor must invest the gains from the sale of a prior investment into an Opportunity Fund within 180 days of the sale of that investment. The investor only has to roll in the gain or profits from the sale, not the original principal of the investment. Moreover, only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.
Investing in Opportunity Funds can provide three substantial potential tax advantages to investors:
Deferral of Capital Gain – A tax deferral for any capital gains rolled over in an Opportunity Fund. The deferred gain would be recognized on the earlier of December 31, 2026 or the date on which the investment in the fund is sold.
Reduction of the Capital Gains Tax Realized – 5 years from the investment date the investors tax basis in the Opportunity Zone investment would increase by 10%. 7 years from the investment date that would increase to 15%. In essence, 15% of the deferred gain would become tax free after 7 years.
No Tax on Any Capital Gains from an Investment in an Opportunity Fund – If the Opportunity Zone investment is held for 10 years or more, then upon the sale of the investment asset, the tax payer will enjoy a step-up in tax basis equal to the fair market value of the investment and thus recognize zero gain on the sale.
Let Downey & Company assist you in maximizing the potential tax advantages available by investing in Opportunity Zones. Please contact Jamie Downey at JMDowney@DowneyCoCPA.com or at 800-849-6022 for more information.
The designated Opportunity Zones in the state of Massachusetts can be found here.
