One of the interesting items coming out of the Tax Cut and Jobs Act of 2017 (TCJA) was the inclusion of specified tax breaks for taxpayers investing in low-income communities. Known as Opportunity Zones, the idea is to encourage long-term investments in low-income communities nationwide through property (real estate or equipment) or business operations.
Where Are the Opportunity Zones?
Over the last few months, the Department of the Treasury has worked with governors to designate qualified Opportunity Zones in each state. Investing in these specific areas will have tax advantages. For example, in Illinois, there are 1,305 tracts, 327 of which (25%) have been designated for Opportunity Zones. A list of the Opportunity Zones can be found here.
What Are the Tax Benefits of Opportunity Zones?
The crux of the program is to allow investors an option to reinvest their realized capital gains into opportunity funds and provide a deferral of at least a portion of the tax on the realized gain. A qualified reinvestment is primarily invested in qualified Opportunity Zones that retain their designation for at least 10 years. In order to qualify for deferral, the reinvestment into an Opportunity Zone must occur within 180 days from the date of the original sale.
For example, a capital gain that was reinvested in an Opportunity Zone and held greater than 5 years in the Opportunity Zone, 10% of the original gain will be excluded from taxes. If held in an Opportunity Zone greater than 7 years, another 5% (for total of 15%) will be excluded. In addition, if the reinvestment in an Opportunity Zone is held greater than 10 years, then not only is the original taxable capital gain reduced by 15%, but any gains from the Opportunity Zone will be excluded from capital gain tax.
For investors, this could be a great time to review any large capital gain tax exposure in order to assess whether the Opportunity Zone deferral is a good investment option given the potential to defer gains. In addition to the deferral of the original gain, the appreciation from the Opportunity Zone investment would not be subject to capital gains when disposed after 10 years. Because there are pending regulations and other requirements that need to be met in order to for Opportunity Zone designation, please contact us for more information.