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. Qualified Opportunity Funds invest in real estate or businesses within designated Opportunity Zones. These zones contain significant commercial, industrial, and residential areas within each of the 50 states and Puerto Rico.
Only capital gains are reinvested in Opportunity Funds, rather than the entire previous investment basis plus gains. 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.