Hidden Benefit within Tax Reform

Opportunity Zones

The Tax Cuts and Jobs Act has received a lot of attention regarding the benefit of tax rate reductions. Although there are still a lot of unanswered questions, one area that could be a major benefit for low-income and up-and-coming neighborhoods and those holding investments is §1400Z – Opportunity Zones. This new provision designates certain areas throughout the country as Opportunity Zones. By investing capital gain into these zones through Opportunity Funds, these low-income and up-and-coming communities could see an increase of capital due to the immediate tax benefits for the investors in the Fund.

The genesis of §1400Z

The struggle of getting capital to these distressed communities is nothing new. Although attempts to incentivize investors have been made in the past, this new provision allows for an immediate benefit to each investor. This is something that could easily accelerate the movement of capital to these areas of the country.

I have capital – what’s in it for me?

If you are sitting on investments that would generate taxable capital gain, you may want to consider cashing in and reinvesting the gain into an Opportunity Fund that is within an Opportunity Zone. If you do, the tax on the capital gain will be deferred for as long as you hold the new investment, or for 10-years, whichever one comes first. If you hold this investment for five years, a 10% permanent reduction in the deferred gain will be allowed. If you hold this investment for an additional two years, an additional 5% permanent reduction in the deferred gain will be allowed. If you hold the investment for the full 10-year period, not only will you receive the 15% permanent reduction in your deferred gain, you also would not have to pay tax on any appreciation of your investment within the Fund.

That’s right – if the Fund does well, you get to cash out without paying tax on the appreciation. If the Fund performs poorly and generates losses, you may be allowed to claim those losses. Win-win!

How do I start?

If you are thinking about triggering a taxable capital gain, then taking advantage of this provision could prove to be very lucrative. The outcomes are simple and you don’t want to miss the opportunity to potentially:

  • Defer gain,
  • Invest in a Fund that appreciates in value and allows you to reap the benefits without paying the tax or,
  • Claim losses if your investment in the Fund depreciates in value.

Where are these opportunity zones?

Click here to view designated opportunity zones across the country.

Click here to view designated opportunity zones in Minnesota.

Check out the FAQs on the IRS website if you are interested in learning more about Opportunity Zones.

If you think an investment in an Opportunity Fund is for you, contact your Lurie advisor to discuss. Happy investing!

Julie Helms, CPA
Specialty Tax Services










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