The Tax Cuts and Jobs Act generated a lot of attention, particularly over the tax cuts themselves. But a lesser known part of the Tax Cuts and Jobs Act that should get some attention is the Opportunity Zones Program. The Opportunity Zones Program, officially known as the Investing in Opportunity Act, was designed to encourage investors to invest in underprivileged communities in exchange for tax relief on capital gains. This allows distressed communities in America or “O-zones” to get the financial relief they need, while allowing investors to park some of their assets in a vehicle that reduces their tax burden, creating huge tax benefits for participants.
The Start of Something Good
The Opportunity Zones Program was proposed by Senator Tim Scott and supported by Sean Parker’s (the former President of Facebook) Economic Innovation Group. Senator Smith, who grew up in a poor area of Charleston North Carolina and Parker who has various entrepreneurial and philanthropic interests have been working on the project for years, net working closely with various lawmakers on both sides of the aisle to gain an overwhelming bipartisan support for the bill. In 2017 the Opportunity Zone Program was able to hitch onto the Tax Cuts and Jobs Act.
What Is The Opportunity Zones Program
The opportunity zones program was designed to increase investment in economically distressed areas of America. It provides an opportunity for poor communities to gain much needed financial support from private investors, as opposed to taxpayers. At the same time it rewards investors with the capital gains benefits both immediately and long term.
How Good is the Tax Benefit
Not only does this tax program have a social good element to it, the tax benefits are extremely beneficial. Opportunity Zones allow investors to defer capital gains, meaning if an investor has $10,000 in capital gains on a stock position and they believe the stock market is going to tank, instead of pulling the cash out and getting hit with
The areas of economic distress that are available for investment are known as Opportunity Zones, or “O-zones”. They are deciphered by the State and certified by the Secretary of the US Treasury. Because the Opportunity Zones Program is designed to develop economically depressed areas, in order to qualify as an O-zone the community must meet certain requirements:
- Must have a poverty rate of 20% or higher or,
- A median household income of no more than 80% of the statewide median household income for communities in non-metropolitan areas.
- A median household income of no more than 80% of the greater state median household income or the overall metropolitan median household income for communities in metropolitan areas.
- A community that is adjacent to a low-income O-zone.
- A median household income no greater than 125% of the median household income of the nearby O-zone.
O-zones have been created in all 50 states, the District of Columbia and 5 US territories. There are currently over 8,700 certified communities. You can see the list of Opportunity Zones here.
Qualified Opportunity Funds
Under the Opportunity Zone Programs, investors can invest in a Qualified Opportunity Fund (QOF). A QOF is an investment vehicle that is organized as either a partnership or corporation that reinvests capital gains in a qualified property located in an Opportunity Zone that holds 90% of its assets is said property. In return for reinvesting capital gains into a QOF the investor can receive up to 3 tax benefits including:
- Temporary tax deferral on any capital gains reinvested in a QOF within 180 days. Tax payment is deferred until the investment is sold or exchanged or until December 31, 2026, whichever comes first.
- A 10% step-up basis for capital gains reinvested in a QOF if the investment is held for 5 years, and an additional 5% step-up basis for the investment if it is held for 7 years. This allows taxpayers to exclude up to 15% of the value of their reinvested capital gains from their taxable income, which in turn decreases their tax liability when they sell or can no longer defer taxation.
- Investors can permanently exclude any capital gains accrued after the investment into the QOF from taxation if the investment is held for at least 10 years.
There are no limits to how much can be invested, how much tax can be avoided, the types of taxes that can be avoided (for most states), and no limit on how long proceeds compound tax-free. Industries and regions that can be invested in are broad, with few restrictions. Vice businesses like liquor stores, casinos, and massage parlors are not eligible.
The Opportunity Zone Project allows investors to invest in communities that really need a financial lifeline, all the while reaping the tax advantages of the program. To learn more about the Opportunity Zone Project contact one of the tax experts at the Tax Hack Accounting Group or subscribe to our newsletter.