The Countdown to the expiring Opportunity Zone 10% capital gain reduction
Updated: Sep 1, 2021
In 2017, there was a bipartisan effort to pass the Opportunity Zone Program. Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States. The purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.
First, an investor can defer tax on any prior eligible gain to the extent that a corresponding amount is timely invested in a Qualified Opportunity Fund (QOF). The deferral lasts until the earlier of the date on which the investment in the QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for at least 5 years, there is a 10% exclusion of the deferred gain. Additionally, the amount of eligible gain to include is decreased to the extent that the amount of eligible gain you deferred exceeds the fair market value of the investment in the QOF.
Second, if the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an adjustment in the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged. As a result of this basis adjustment, the appreciation in the QOF investment is never taxed. A similar rule applies to exclude the QOF investor’s share of gain and loss from sales of QOF assets. (Opportunity Zones Frequently Asked Questions | Internal Revenue Service (irs.gov)
As stated above, one of the key benefits of this program was the ability to defer taxes on realized capital gains until December 31st, 2026. In order take advantage of this benefit, an investor must allocate into an OZ fund before the end of 2021. This will allow the investor a 10% capital gain reduction, but the clock is ticking. There has been some debate in Congress as to whether they will extend the deadline on this benefit but that has yet to be resolved. For those of you that have capital gains and may look to take advantage of the deferral, please contact us email@example.com and we can send over our most recent opportunity Zone projects.