What is the ‘Opportunity’ in Opportunity Zones?
Source: Newburg CPA- November 24, 2020
As part of the new tax law enacted in 2017 by the Tax Cuts and Jobs Act (TCJA) a new way to defer recognition of capital gains was born by the way of Opportunity Zone investments. The reinvestment of capital gain proceeds into Qualified Opportunity Zone Funds, allow eligible taxpayers with highly appreciated assets the opportunity to defer capital gains while investing in economically distressed communities. Below we have provided an overview of the mechanics and how it may benefit you.
What is an Opportunity Zone or Qualified Opportunity Zone Fund?
- Opportunity Zones (OZ), established by the TCJA, are economically-distressed communities where new investments may be eligible for preferential tax treatment as long as certain conditions are met. These zones have been identified by local authorities.
- Qualified Opportunity Zone Fund (QOF), a corporation or partnership that holds at least 90% of its assets in Qualified Opportunity Zone property.
Where are Qualified Opportunity Zones located and is there a list available?
The list of each Qualified Opportunity Zone can be found at Designated Qualified Opportunity Zones under IRS Code and Amplification of Notice 2018-48 to Include Additional Puerto Rico Opportunity Zones.
How does this work?
- Once realizing either a short term or long-term capital gain or qualified 1231 gains, an eligible taxpayer can make an election to reinvest the proceeds from the eligible gain into a Qualified Opportunity Zone Fund (QOF) directly. You may make an election to defer the gain, in whole or in part, when filing your federal income tax return (on the return that the tax on gain would be due if not deferred).
- This reinvestment must be reinvested within 180 days after the liquidation/disposition/sale.
- The taxation of the capital gain is then deferred until December 31st, 2026. As of this date, the taxpayer is required to recognize and pay taxes on the lessor of (a) the deferred gain; or (b) the Fair Market Value (FMV) of the investment.
- The length of time the investment is held in the Opportunity Zone vehicle will determine the amount deferred or excluded (see important dates below).
What are the important dates that determine how much can be deferred or excluded?
Investment in QOF held for at least 5 years :
- Investor’s basis increases by 10% of the deferred gain invested into the QOF.
- To receive 10% basis increase, investments in QOF must be made by December 31, 2021.
Investment in QOF held for at least 7 years :
- Investor’s basis increases by 15% of the deferred gain invested into the QOF.
- To receive 15% basis increase, investments in QOF must have been made prior to December 31, 2019.
Investment held for more than 10 years :
- Upon sale, investor’s basis “steps up” to fair market value and the entire gain is excluded.
- Investment must be made on or before December 31st, 2026 to be eligible.
- Investments can be held through 2047 w/o losing tax benefits.
Please note that this is not intended to be an all-inclusive summary of Opportunity Zone tax implications. For more extensive information regarding additional nuances and Q&A we recommend you visit the IRS website at IRS.gov Opportunity Zone General Information and FAQ’s
Please contact us if you would like more information on how this tax planning item may benefit your specific situation. Please also visit our website at www.newburg.com
Newburg & Company, LLP