The Tax Cuts and Jobs Act has made sweeping changes to the Tax Code with most of its provisions being effective for the 2018 tax year. By now, most of the major changes have been gone over in excruciating detail, however there seems to be one thing that hasn’t been talked about much: Opportunity Zone Funds.
What Are They?
Opportunity Zones are geographical areas set by the states that are deemed to be under developed. In order to encourage economic development, the IRS is offering large tax incentives to those willing to invest in these areas.
What Are The Benefits?
There are 3 major tax benefits associated with investing in Opportunity Zones:
- Capital Gain Deferral: When you would incur a capital gain, you may defer recognizing the gain if it is subsequently invested in an opportunity zone fund. The gain must be used to purchase an equity interest in a qualified fund which has 90% of its assets invested in an opportunity zone within 180 days of the sale. The gain is deferred until the earlier of December 31, 2026 or when the investment is sold.
- Step-Up in Basis: After the investment is made, if it is held for 5 years, you will receive a 10% increase in basis. If the investment is held for 7 years or more you will receive an additional 5% step up in basis for a total of 15%. To qualify, the holding period must be met before December 31, 2026 making the last year to invest 2019.
- Tax Free Appreciation: After the investment is held for 10 years, any appreciation on the investment is tax free. In order to qualify, the investment must sold before December 31, 2047 making the last year to invest 2037.
Where are they?
A map of all the opportunity zones can be found on the Department of Treasury site: Click Here.
This program presents a great tax planning opportunity for the coming years. If you have any questions on how this could be used to your business’s advantage or want to learn how to start a fund, please reach out to our team of experts. We are always ready to help you make the most of these exciting new changes.
By Matthew Goodfellow, CPA, Tax Manager – Harris CPAs
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