What You Need to Know About Opportunity Zones
Trump's tax reform law of late 2017 is drawing renewed interest from venture capitalists and philanthropists due to the tax shelter it creates. A program hidden in the law aims to tap into an estimated $6.1 trillion in unrealized capital gains to spur economic growth in low-income communities throughout the U.S.
The Opportunity Zones program utilizes tax incentives, similar to a 1031 Exchange, to encourage investors to take advantage of investment opportunities in specific communities.
Keep reading to learn what you need to know about Opportunity Zones.
Who Created Opportunity Zones?
According to the IRS Q & A website, Opportunity Zones were established by Congress in the Tax Cuts and Jobs Act, which passed on December 20, 2017.
Opportunity Zones were inspired by the Investing In Opportunity Act, a bipartisan community development program that was championed by senators Tim Scott (R-NC) and Cory Booker (D-NJ), representatives Ron Kind (D-WI) and Pat Tiberi (R-OH), and nearly 100 congressional cosponsors.
Economic Innovation Group (EIG) first conceptualized Opportunity Zones in 2015 in Unlocking Private Capital to Facilitate Growth in Distressed Areas, a whitepaper written by Jared Bernstein, an integral member of the Obama Administration's economic team, and Kevin Hasset, the chairman of the Council of Economic Advisers and co-author of the book Dow 36,000.
What Is an Opportunity Zone?
An Opportunity Zone is an economically challenged area in an urban or rural community, in which federal tax incentives are offered to investors to reinvest their unrealized capital gains into these areas.
A location may qualify as an Opportunity Zone once it has been nominated by the state and its nomination has been certified by the Secretary of the U.S. Treasury. The first set of Opportunity Zones were designated on April 9, 2018. The Opportunity Zones cover parts of 18 states. Click here for the map (Adobe Flash plugin required).
What Is a Qualified Opportunity?
When an investor realizes a gain from a sale or exchange of a capital asset, they have 180 days from the date of the sale or exchange to reinvest the gain into a qualified partnership or corporation.
These funds must be used to significantly improve eligible properties, businesses, and partnership interests located within the zone.
It is the responsibility of the entity and the taxpayer to self-certify the investment. Later this summer, the IRS will release a form that eligible taxpayers must complete and attach to their federal income tax return for the taxable year. No approval or action by the IRS is required.
How Do Opportunity Zones Benefit Investors?
There are three tax incentives available to investors who reinvest their capital gains into Opportunity Zones.
These benefits are available to all taxpayers who invest in qualified assets, regardless of whether they live in an Opportunity Zone or not.
1. Temporary Deferral of Tax
Taxpayers may elect to defer tax on prior gains if they have been reinvested into a qualified Opportunity Zone within 180 days of the asset sale. The tax may be deferred until the earlier of the date on which the investment is sold or exchanged, or until December 31, 2026.
The election to defer tax on that gain should be made on the federal tax return for the year in which the tax on that gain would be due had it not been deferred. IRS form 8949 must be completed and attached to the tax return as part of the deferral election procedure.
If you wish to defer taxes on a gain acquired during 2017 and have already filed your tax return, you may file an amended return and attach a completed IRS form 8949.
2. An Increase in Basis
Up to 15% of the original gain that was reinvested into a qualified Opportunity Fund may be excluded from taxation, depending on the amount of time the investment is held in the fund by the taxpayer.
If the reinvestment is held in the opportunity fund by the taxpayer for at least five years, the basis of the capital gains will increase by 10%. The basis will increase by 5% if the investment is held for at least seven years.
3. A Permanent Exclusion
The interest accrued from capital gains invested into a qualified opportunity fund may be permanently excluded from taxation if the investment has been held in the opportunity fund by the taxpayer for a minimum of ten years before it is sold or exchanged. This exclusion only applies to gains accrued after investment into an opportunity fund.
Where Can I Find Out More About Opportunity Zones?
A current list of approved Opportunity Zones is available at Opportunity Zone Resources. The list is updated in real-time as more Opportunity Zones are approved. A complete list will be published in Spring of 2019 once all Opportunity Zones have been nominated, certified and designated.
More information about Opportunity Zones, including legal advice, will be released by the Treasury Department and the IRS in the coming months. Information will be available at Treasury.gov and IRS.gov as it becomes available.
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