Among the many provisions included in the Tax Cuts and Jobs Act is a new type of community development program, referred to as “Opportunity Zones.” As defined on the IRS website, an Opportunity Zone is “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatments.” Read on to learn about what qualifies an area as an Opportunity Zone and how you can realize tax benefits by participating!
For an area to qualify as an Opportunity Zone, it must be nominated for the designation by the state and then certified by the Secretary of the Treasury (a task which has been delegated to the IRS). On April 9, 2018, the IRS designated the first group of Opportunity Zones—visit the U.S. Department of the Treasury’s Opportunity Zones Resources page to view a map of all currently designated Qualified Opportunity Zones.
What tax benefits can investors realize through this program? The Opportunity Zone program allows gains from the sale of a property or investment to be rolled into a Qualified Opportunity Fund, which the IRS defines as “an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone.” Money invested into a Qualified Opportunity Fund within 180 days of the sale of an investment stays, in effect, unrecognized while it remains in the fund.
Not only can an investor defer tax on the capital gains reinvested in the Qualified Opportunity Fund, but also, if the funds are held for a set number of years, the investor becomes eligible for tax savings on a step-up basis (an effective reduction in the amount of capital gains finally recognized). Note that all deferred gain (potentially only 85% after basis step-up) becomes taxable on December 31, 2026. Here’s a quick overview of the savings timeline:
|Years Held in Qualified Opportunity Fund||Tax Benefit|
|5 years||10% step-up in basis|
|7 years||15% step-up in basis|
|10 years||15% step-up in basis + permanent exclusion of gains made post-contribution|
Please note that the program requires a minimum of 90% of the assets of the Qualified Opportunity Fund to be Qualified Opportunity Zone Property. Additionally, this incentive went into effect on 12/31/17, so the amount invested in any pre-existing property (property purchased prior to the program’s effective date) must exceed the investor’s basis in the property in order to qualify.
The process for establishing a Qualified Opportunity Fund is a self-certification by an eligible taxpayer. The IRS intends to release a certification form sometime this summer; eligible taxpayers will simply need to fill it out and attach it with their federal income tax return.
If you’re interested in finding out more about the Opportunity Zones program, visit IRS.gov. Additionally, be on the lookout for more information slated for release by the Treasury Department and the IRS over the coming months. As always, feel free to reach out to your Kernutt Stokes advisor with any and all questions.