The Tax Cuts and Jobs Act of 2017 created a new method of deferring taxes on capital gains. More versatile and robust than a traditional 1031 exchange, investments in Opportunity Funds can defer and reduce short- and long-term capital gains taxes generated by ALL types of investments, not just real estate.
Here’s how it works. Investors can invest cash equal to any capital gains realized in the previous 180 days with Qualified Opportunity Funds. Qualified Opportunity Funds invest in real estate or businesses within designated Opportunity Zones. The zones are census tracts that contain commercial, industrial, and residential areas within each of the 50 states and Puerto Rico.
With Section 1031 exchanges, investors have to roll over their entire investment basis into a new property, or they are taxed on the “boot.” With Opportunity Funds, you can retain your entire basis and defer taxes as long as you invest your capital gains. It is only capital gains that need to be invested into Opportunity Funds to defer and potentially reduce taxes. Investments held through Opportunity Funds enjoy a tax deferral until December 31, 2026, or the date of a sale, whichever is earlier. The original capital gains tax is reduced by 10% after 5 years, and by 15% after 7 years. After 10 years, investors pay no capital gains on the new investment’s increased value.
Furthermore, Opportunity Fund investors may combine these tax breaks with newly modified expensing and depreciation rules to create passive losses that can be used to offset other income.
Learn more about the potential tax benefits of investing in Opportunity Zones by downloading our white paper.