First, What Are Opportunity Zones?
An opportunity zone is a disadvantaged community where new investments, under strict conditions, may be eligible for tax incentives provided through the Tax Cuts and Jobs Act of 2017.
Read more about it : All About Opportunity Zones
Second, How Do Opportunity Zone Funds Work?
Opportunity zones provide tax incentives to those with capital gains. Any corporation or individual can take their unrealized capital gains and invest them in an opportunity zone fund.
Different Qualified Opportunity Funds are started by active real estate investors – whether through partnerships, limited liability companies (LLC), or corporations. The fund must file the correct paperwork and adhere to IRS regulations. Any assets they invest in must be either operating, abandoned or undeveloped, and must show significant improvement within 30 days of being purchased.
Then, What Tax Incentives Can Investors Claim?
There are three types of tax benefits investors can claim for investing unrealized capital gains in Opportunity Zone Funds. Investors can take advantage of one or more of these benefits.
- Tax Deferral Unit 2026: Investors can invest assets with capital gains into opportunity zone funds. This defers the tax on the capital gains until 2026 or until the asset is disposed of.
- Basis Step-Up Of Deferral Gains: Capital gains in an opportunity fund for 5 years have an increase of 10% on the original investment. If the investment is in an opportunity fund for 7 years, the increase is 15%.
- No Taxation On Appreciation Of Capital Gains – Investors pay no taxes on capital gains produced through investment in opportunity funds when they’re held for at least 10 years.
The purpose of these benefits is to incentivize investment in areas where investment could result in substantial improvement.
The Bottom Line
While opportunity zone investments aren’t for every portfolio, the program provides several tax and social benefits. Whether you would benefit from investing in an opportunity zone depends on your finances.
Understand the capital gains tax before investing. If you’re receiving significant capital gains, putting some of your cash or assets into an opportunity fund could be well worth the benefit.
There are thousands of opportunity zones. Each state and territory has a different strategic approach to making them work. On top of that, different Qualified Opportunity Funds operate in these zones. You need to investigate where you’re putting your money and know why it’s going there.