Opportunity ZonesMay 27, 2020 Educational
Defer capital gains tax with Opportunity Zones under the Tax Reform Act
The 2017 Tax Reform Act included a potential tax break for investors. Through this program, an investor may defer capital gains taxes on the sale of any asset by investing those gains through a Qualified Opportunity Fund. These original taxes can potentially be deferred until 2026, or upon the sale of the new investment (whichever is earlier). Alongside the deferral, this original capital gains tax is reduced by up to 10% or 15% over time, depending on the length of time the investment is held before the deferral is due. In addition to those benefits, when held long enough, appreciation from the new investment can be realized tax free.
How does the opportunity zones program work?
An investor sells an asset and generates a capital gain. The capital gains from that investment must be reinvested within 180 days into a Qualified Opportunity Fund (QOF). The QOF, will then make investments into designated Opportunity Zones (OZ). An OZ is a government-designated census tract. Large parts of the U.S. were designated by their state governments in 2018, including many commercial, industrial, and residential areas.
The furthest that an investor can defer taxes by reinvesting capital gains into a QOF is until Dec 31, 2026, when all remaining deferred gains become realized. If, by this point, the investor had held the investment for a minimum of five years, the capital gains liability on the original investment will be reduced by 10%.
Past Dec 31, 2019, it is no longer possible for a new investment into a QOF to be held for seven or more years (Jan 1, 2020 is less than seven years from Dec 31, 2026) by the time the deferral is considered realized in 2026. As a result, the maximum reduction possible, at this point, is 10% for holding the investment for a minimum of five years, but not more than seven years.
The final key point to note is that after holding the investment in the fund for a minimum of 10 years, if investment in the fund creates a new capital gain, the new capital gain tax liability generated from the investment is reduced to zero. It is also possible to generate stable cash flow and receive additional tax benefits through expensing and depreciation from your investment in a QOF. We believe this is one of the most beneficial tax reforms in decades. Learn how Virtua Partners can potentially help you take advantage of this opportunity.