The Tax Cuts and Jobs Act of 2017 is offering investors the opportunity to reduce or even eliminate their capital gains liability. As part of the 2017 law, investment in “Opportunity Zones” will give investors the ability to defer federal taxes on capital gains in qualifying circumstances. It is hoped that this new tax incentive will draw long-term investment to parts of the US that continue to struggle with high rates of poverty and low economic growth.
The benefits of Opportunity Zones include not only the revitalization of neighborhoods and towns currently starved for investment but also a huge potential windfall, in the form of substantially reduced or deferred capital gains taxes, for corporations and financiers who invest in them. Their creation represents the first substantial and systematic attempt by the federal government in decades to funnel investment into those communities which have not shared in the general economic uplift.
State governors and Treasury officials are now empowered to designate areas in all fifty states, the District of Columbia, and five US territories as Opportunity Zones. Investors who choose to put their money into projects in these qualifying zones will receive tax breaks for which projects outside those areas will not be eligible. In order to benefit from them, investors will create Opportunity Funds to seed either new businesses in those areas, expansions of existing ones, or real-estate development.
There are some limitations already baked into the law, including restrictions on what proportion of qualifying tracts may be designated as Opportunity Zones (states are limited to only a quarter of those eligible tracts). And new guidance forthcoming from the Treasury Department will establish precisely what sorts of investments qualify for the tax breaks associated with Opportunity Zones.
Nevertheless, it is clear that investors in Qualified Opportunity Funds stand ready to significantly minimize their tax burden through preferential treatment of capital gains.
The creation of this new mechanism was pushed by upstart Washington think tank the Economic Innovation Group and its patron, tech mogul Sean Parker, formerly of Napster and Facebook. According to the group, more than $2 trillion in unrealized capital gains is sitting on individual and corporate balance sheets across America. Proceeds from the sale of assets would normally be taxed as a capital gain, at a maximum federal rate of up to 23.8%. But this new law offers investors the chance to roll those unrealized gains into an Opportunity Fund within 180 days of the sale of an asset and defer federal taxes on the profit, at least temporarily.
That deferral becomes capital gains tax relief the longer the investment is held, favoring more patient investors. An investor who retains an investment for seven years will enjoy a 15% reduction in the capital gains taxes that would have been due on the original investment. If the investment is held for more than 10 years, the investor permanently avoids capital gains taxes on any gains from the Qualified Opportunity Fund investment.
Here’s a quick summary of what’s involved:
What is a Qualified Opportunity Fund?
A Qualified Opportunity Fund is a new investment vehicle created as part of the Tax Cuts and Jobs Act of 2017 to incentivize investment in targeted communities called Opportunity Zones.
What are Opportunity Zones?
Opportunity Zones are census tracts designated by state and federal governments targeted for economic development.
Why invest in Qualified Opportunity Funds?
Opportunity Funds allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as no tax on gains from an Opportunity Fund if the investment is held for 10 years.
How does Qualified Opportunity Fund investing work?
An investor who has triggered a capital gain by selling an asset like stocks or real estate can receive special tax benefits if they roll that gain into a Qualified Opportunity Fund within 180 days.
Who to call?
At Rooney Nimmo, we have lawyers well versed in the new tax code and with Opportunity Zone investing. If you have any questions or wish to schedule a meeting, please contact us here.