Wednesday, October 31, 2018
Capitalizing on the new Opportunity Zone program spurs economic development in distressed communities through federal income tax incentives.
The recent federal tax reform bill included provisions creating a new program through which a taxpayer can defer income tax on capital gains. The Opportunity Zone program allows a taxpayer to reinvest proceeds from the sale of an eligible business or property into an Opportunity Fund. This Opportunity Fund, in turn, will invest in one or more businesses or properties located within qualified Opportunity Zones. Qualified Opportunity Zones are low-income areas that have been specifically designated by the state and federal government.
By investing in an Opportunity Zone through an Opportunity Fund, a taxpayer can take advantage of up to three benefits, depending on the length of the investment.
- Temporary deferral
A taxpayer can defer any tax owed on capital gains by investing the realized gain in an Opportunity Zone. The tax liability is deferred until December 31, 2026, or at such earlier time that the taxpayer disposes of the Opportunity Zone investment.
- Reduction in gain realized through basis adjustment
For capital gains that are reinvested into an Opportunity Zone, the basis of the investment will increase by 10 percent if the taxpayer holds the investment for at least 5 years and by an additional five percent if the investment is held by the taxpayer for at least seven years. Therefore, a taxpayer can raise the basis of an investment in an Opportunity Zone by 15 percent of the amount of the initial investment by holding the investment in the Opportunity Zone for at least seven years.
- Exclusion for capital gains on the Opportunity Zone investment
If an investor holds the Opportunity Zone investment for at least 10 years, then the basis of the investment is its fair market value as of the date on which the investment is disposed. Therefore, a taxpayer will generally not be taxed on the gain realized from the disposition of the Opportunity Zone investment after 10 years.
A taxpayer must invest in an Opportunity Fund within 180 days of the disposition of the existing property to be eligible for the tax benefits under the program.