Have you heard about a new investment program called the Opportunity Zone? The tax act of 2017 created an incentive program for long-term investments in urban and rural areas of low-income across the country.
When you re-invest your unrealized capital gains into an Opportunity Fund, it qualifies for several tax incentives. It is also subject to a 7 percent appreciation rate and a long-term capital gains tax rate of 23.8 percent. You can choose one zone or multiple zones in which to invest.
How do Opportunity investments work?
After-tax Opportunity investments are eligible for three tax incentives. After investments are deposited into an Opportunity Fund, they can take advantage of the following incentives:
- Temporary deferral: Your investment is deferred from inclusion of taxable income until it is disposed or on December 31, 2026.
- Step-up in basis: The basis of your investment experiences a 10 percent increase if you hold the investment for 5 years. It increases another 5 percent if it is held for seven years.
- Permanent exclusion: The capital gains on a ten-year Opportunity Fund investment are permanently excluded from your taxable income.
Where are Opportunity Zones?
These investments go toward improving low-income areas throughout the U.S. called Opportunity Zones. Online maps show the represented areas. Every state has more than a dozen zones. Some are cities, boroughs or neighborhoods, and some include entire counties.
In these areas, at least 20 percent of median incomes do not exceed 80 percent of those in the surrounding area. Every state governor nominated their low-income census tracts as Opportunity Zones. These areas are certified by the Secretary of the Treasury.
Investments seeking tax benefits in Opportunity Zones must be made through a qualified Opportunity Fund. A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property). A Limited Liability Company can organize a qualified Opportunity Fund if it is treated as a corporation or partnership for federal tax purposes.
Our firm’s attorneys frequently counsel investors, fund managers the full benefits of the new Opportunity Zones program presented by H.R. 1, the tax reform bill. Reach out to our attorneys to speak with us about your options.
Devon A. Kinnard, Partner