How Do Opportunity Zones Work?

Opportunity Zones were created in the 2017 Tax Cuts and Jobs Acts.  Opportunity Zones (OZ) are economically distressed areas of the United States and its territories that allow for preferential tax incentives for certain investments within these areas.  The purpose of OZ is to spur economic growth and job creation in low-income communities through tax incentives that reward long term investment. OZ were a bi-partisan idea created under the Tax Cuts and Jobs Act of 2017.  There is currently over 8,700 OZ in the United States and its territories.   The OZ program is in effect until December 31, 2026 unless it is extended by an Act of Congress. 

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Who Can Invest in Opportunity Zones?

What are the Benefits of Investing in Opportunity Zones?

How To Invest in Opportunity Zones

While anyone with a capital gain can technically invest in an Opportunity Zone Fund, most Qualified Opportunity Funds that are raising money from outside investors have filed for an SEC exemption under Regulation D (i.e. Rule 506(b) or 506(c)).  Under this exemption these Funds can only be sold to accredited investors.  An accredited investors is someone who:

  • Earns $200k per year or $300k together with a spouse; or

  • Net worth over $1 million (excluding primary residence); or

  • Holds Series 7, 65 or 82 Securities license

Additionally many Qualified Opportunity Funds have high investment minimums.  These minimums range from $25 - $250k.

Many believe the tax shelters associated with Opportunity Zones are as generous as any program the US Government has offered.  While investors can no longer receive a 10% step up basis in their original capital gain, there are two major advantages to investing in Opportunity Zones over other similar investments:

 

Tax Deferral

  • Perhaps the most well-known opportunity zone benefit is tax deferral. The original gain realized does not need to be recognized until December 31, 2026. In an inflationary environment, the delay in paying capital gains tax has significant time value of money savings.

Tax Free Sale

  • If they investor holds the QZ Investment for 10 years, the gain on that investment is tax free

To defer tax on an eligible gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt) within 180 days of realizing the gain. In general, if you don’t defer the gain, the gain would be recognized for federal income tax purposes the first day of the 180-day period. Once you have done this, you can elect the deferral on IRS Form 8949, for the taxable year in which the gain would be recognized if you didn’t defer it. Also, complete and submit IRS Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments.

Source: irs.gov

If you have questions or you’d like more information about how opportunity zones work, contact us today.

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