In 2017, the federal government passed the Tax Cuts and Jobs Act. It was this act that began the process of designating opportunity zones. The purpose of this program is to create an incentive for investors that encourages long-term investments in low-income neighborhoods, creating opportunities for private investors and disadvantaged communities.
The benefits of opportunity zones to affected communities are obvious. The program draws in investors and helps to promote local development. However, this program also offers three distinct advantages to investors in the form of impressive tax benefits.
- Tax Deferral
So, why invest in opportunity zones? The first compelling reason is that opportunity zone investors can defer taxes on their capital gains, provided several conditions are met. To be eligible for capital gains tax deferral, investors will need to match the property’s purchase price in renovations and reinvest the capital gains into opportunity funds or zones. Once they’ve met those conditions, investors can take advantage of the program’s tax deferrals either until they sell their assets or until 2026 when the program expires.
- Step-Up In Basis
People and groups that choose to invest in opportunity funds receive a 10% step-up in basis after five years, as long as they invest in the fund before 2026. Investors can also get an additional 5% step-up in basis after seven years.
While the timeframe for opportunity zone investment no longer allows new investors to take advantage of the maximum 15% step-up in basis, those who invested before December 31, 2019, are already eligible for capitalizing on it. Anyone who invests before the end of 2021 will still be able to capitalize on the 10% step-up in basis, so now is the time to get involved with this promising federal program.
Wondering how this works in practice? Let’s take a look at an example. An investor sells an asset for $1 million, generating a $1 million capital gain. The investor then invests those funds into an opportunity zone within 180 days of the sale, avoiding capital gains tax. With the step-up in basis, the investor would be given 10% of the original investment, or $100,000, after five years. Just keep in mind that 2021 is the last year that investors will be able to take advantage of the 10% step-up in basis, so it’s important to act fast.
- Tax-Deferred Becomes Tax-Free After 10 Years
The goal of the opportunity zone program is to encourage long-term investing, so it makes sense that the Tax Act’s creators included this stipulation. If an investor keeps his or her money in a qualified opportunity fund for 10 years, then decides to sell, he or she will then be able to exclude all capital gains from taxable income.
To take advantage of the tax-free status of opportunity zone investments once they’ve reached the 10-year benchmark, investors must meet some eligibility requirements. First, they need to invest in qualified opportunity zones. Second, they need to make proper deferral requests until the investment reaches the 10-year mark.
Learn How to Get Started
Interested in taking advantage of the tax benefits associated with opportunity fund investment while simultaneously injecting some much-needed cash into struggling local economies? It’s time to find a qualifying opportunity fund and invest those capital gains from a business sale, investment, or another qualifying transaction in something truly meaningful. Reach out to a qualified opportunity fund or investment advisory agency today to learn how to get started.
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