The Tax Cuts and Jobs Act is widely known as providing benefit in the realm of tax rate reductions. One area that has potential to provide major benefit for lower-income and up-and-coming neighborhoods, as well as those holding investments, is that of §1400Z – Opportunity Zones. This new provision allowe for the designation of certain areas throughout the country as Opportunity Zones and, by investing capital gain into these zones through designated Opportunity Funds, these lower-income and up-and-coming communities could see an influx of capital due to the tax benefits for the investors in the Funds.
The Genesis of §1400Z
The struggle of getting capital to the distressed communities throughout the country is nothing new. Although attempts to address and incentivize investors have been made in the past, this new provision allows for an immediate benefit to the investors, something that could do the trick to spur the movement of capital to these areas of the country.
I’ve Got 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 investment or 2026, whichever comes first. If you hold your investment for five years, a 10% permanent reduction in the deferred gain will be allowed. If you hold your investment for an additional two years, an additional 5% permanent reduction in the deferred gain will be allowed. If you hold the investment for a 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 – the fund does well and you get to cash out without paying tax on the appreciation. If the fund doesn’t do well and throws losses and you’d otherwise be allowed to take those losses, they’re yours to claim! Win-win! Note that a tax event will happen in 2026 when tax on the initial investment of deferred gains will be due.
How Do I Start?!
If you have or are thinking about generating capital gain, taking advantage of this provision and investing in Opportunity Funds could prove very lucrative. To miss the opportunity to potentially permanently defer gain and invest in a fund that, if it appreciates in value allows you to reap the benefits without paying the tax or, if it doesn’t do as well as you’d hope – still claim the losses seems like a no-brainer!
Wondering where you might have to go? Here’s a link showing the designated opportunity zones across the country: https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml
Looking to invest in Minnesota? https://mn.gov/deed/business/financing-business/tax-credits/opp-zones/census-opp-zone-tracts.jsp
If you think an investment in an Opportunity Fund is for you, talk to your Lurie, LLP advisor.