Tax Savings Through Investments in Opportunity Zones
With the passing of the Tax Cut and Jobs Act came new legislation with goals of spurring the economy and bringing new incentives for those willing to invest in economically-distressed communities. The creation of Opportunity Zone Investments allows taxpayers to defer paying tax on capital gains realized from December 22, 2017 through December 31, 2026. Capital gains can be generated from the sale of any capital investment including stock, business interests, and real estate. For those who invest their capital gain funds into a Qualified Opportunity Fund (QOF), the tax on their gain does not have to be paid until December 31, 2026 and they may even receive a bit of a discount for holding the investment for more than five years. The investment in a QOF must be made within 180 days of the sale of the capital asset and can only be made once per sale – which is designed to limit multiple investments from installment sales.
A Qualified Opportunity Fund is a corporation or partnership organized for the purpose of investing in qualified opportunity zone property and is required to hold at least 90% of its assets in such property. A qualified opportunity zone property can either be stock, partnership interest, or business property (ex: real estate). Be aware that a penalty will apply for each month the Fund fails to maintain 90 percent of its assets in qualified opportunity zone property unless the failure is due to reasonable cause.
This election allows the taxpayer deferral of the taxable gain until the sooner of the investment being sold or December 31, 2026. Although you are required to pay the tax on the gain by December 31, 2026 at the latest, the amount of your taxable gain may decrease if you hold the investment longer than 5 years:
- If the investment is held under five years, the entire gain is taxable at the earlier of the investment being sold or December 31, 2026.
- If the investment is held for at least five years, 90% of the original gain is taxable (you receive a 10% discount).
- If investment is held for at least seven years, 85% of the original gain is taxable (you receive a 15% discount).
- If the investment is held for at least ten years, you owe no tax on the appreciation of the investment upon sale if you make a timely Fair Market Value election (note: you still pay tax on 85% of the original gain at December 31, 2026).
The Fair Market Value election does not have to be made if you are generating a loss after ten years of ownership. You can take the loss on your investment at the time you dispose of your interest in the fund.
Before creating or investing in your own Opportunity Zone investment, we strongly recommend reaching out to your contact at DKC. Many of the provisions above are proposed regulations to the tax code and have not been fully finalized. This guidance has been summarized and there are many limitations that may affect your ability to attain the tax savings noted.