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The Tax Benefits of Investing in Opportunity Zones

Services: Tax

Introduction
The Tax Cuts and Jobs Act of 2017 (“TCJA”) brought sweeping changes to the tax code not seen since the 1980’s.   A key development of the TCJA was the creation of Opportunity Zones.  These economically distressed areas across the United States and its territorial possessions were the focus of lawmakers, who sought to spur economic development and investment within these zones.  Investment within an Opportunity Zone presents tax “opportunities” for investors with capital gains, with the most notable being tax deferral and gain forgiveness.  

Qualified Opportunity Funds
To be eligible to receive the tax incentives offered by investment in Opportunity Zones, capital gains must be invested into a Qualified Opportunity Fund within 180 days of the sale that generated the gain.  A Qualified Opportunity Fund is an investment vehicle that invests in Qualified Opportunity Zone Property.  

Tax Benefits
Investment in Qualified Opportunity Funds offers three distinct tax advantages that are intended to encourage economic development within the Qualified Opportunity Zones.  Capital gains that are rolled into a Qualified Opportunity Fund are eligible to be deferred until December 31, 2026. 

  1. Capital gains that are rolled into a Qualified Opportunity Fund are eligible for a 10% step-up in basis at year five, and an additional 5% step-up in basis at year seven. Because the original capital gain invested in the Qualified Opportunity Fund must be recognized on December 31, 2026, the five or seven year milestones must be met by that date.  
  2. Once the opportunity fund investment has been held for at least ten years, any capital gain realized on the sale of an opportunity fund investment can be excluded from taxation.  
  3. The initial capital gain is deferred until December 31, 2026.  The taxpayer will recognize the initial capital gain invested into the opportunity fund, less applicable basis step-ups arising from the five and seven year milestones.  
  4. If, after a ten year holding period, the taxpayer decides to sell its interest in the opportunity fund, because the ten year holding period requirement has been met, the taxpayer is able to waive the entire gain for tax purposes.  

Conclusion
Opportunity Zones present multiple opportunities for investors and economically distressed areas across the country.  As we approach the end of 2019, it is important that investments are timely, as opportunity fund investments must be made by December 31, 2019, in order to meet the seven year holding period requirement.  

HPG is here to assist with any opportunity zone questions that may arise.