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SPECIAL OZONE UPDATE
Opportunity Zones –
Additional Changes from the IRS
What are Opportunity Zones?
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Opportunity Zones are designed to spur economic development and job creation in these communities by providing tax benefits to investors.
Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The Opportunity Zones program provides a tax incentive for investors to re-invest their realized capital gains into Opportunity Funds that are dedicated to investing into Opportunity Zones designated by the chief executives of every U.S. state and territory.
The U.S. Treasury, in collaboration with State and Local governments, has certified 8,762
communities in all 50 states, the District of Columbia, five U.S. territories and Puerto Rico as Opportunity Zones. “Nearly 35 million Americans live in areas designated as Opportunity Zones. These communities present both the need for investment and significant investment opportunities.” – US Treasury
A federal list of designated opportunity zones are available by clicking here
Most States have their own websites and maps as well.
What qualifies as an Opportunity Zone?
To qualify as an O-zone, a census tract must have a poverty rate of 20% or higher or a median household income that is less than 80% of the surrounding area. The law generally allows for 25% of a state’s low-income community population census tracts to be designated as qualified opportunity zones. Governors are responsible for identifying the areas in their states to be designated as opportunity zones. The same definition of a “low-income community” that is used by the new markets tax credit (NMTC) as the basis for defining an opportunity zone.
What is a Qualified Opportunity Fund (QOF)?
A qualfied opportuntiy fund (QOF) is an investment vehicle that specializes in aggregating private investments and deploying that capital in an Opportunity Zone (Ozone).
To take advantage of the tax benefits of investing in Opportunity Zones, investors must reinvest their capital gains from a prior investment into a Qualified Opportunity Fund (QOF), within 180 days of the recognized sale of that prior investment.
What are the tax benefits of investing in Opportuntiy Funds?
Under Section 1400Z of the Tax Cuts and Jobs Act of 2017, investors who elect to reinvest capital gains into Opportunity Funds will receive multiple capital gains tax benefits that will allow an investor to defer, reduce, and ultimately eliminate future capital gains.
Qualified Opportunity Fund Incentives
1. Deferral of
Capital Gains Taxes:
Capital gains (short-term or long-term) from the sale of any asset that is reinvested in Opportunity Funds within 180 days following the disposition of that asset, shall be excluded from the investor’s gross income until the earlier of: December 31, 2026, or the date the investor sells his investment.
2. Reduction of
Capital Gains Taxes:
Investors in Opportunity Funds will receive a 10% step-up in the basis of the capital gains that are reinvested in Opportunity Funds, if the investment is held for 5 years, and an additional 5% step-up in basis if the investment is held for 7 years, thereby excluding up to 15% of the original capital gains from taxation.
3. Elimination of Capital Gains Taxes for Investments in Opportunity Funds:
Opportunity Fund investors are exempt from federal taxation on capital gains derived from the appreciation of their investment if the investment is held for at least 10 years.
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Qualified Opportunity Fund Deferral Timeline