On December 22, 2017, the Tax Cuts and Jobs Act created a new section of the Tax Code (26 U.S. Code 1400Z) that provides tax incentives for investments in targeted areas in the United States through investment vehicles called Opportunity Funds. The purpose of Opportunity Funds is to promote economic development in these select communities, known as Opportunity Zones, by offering investors substantial federal tax advantages that are only available through the new program.
Opportunity Zones are census tracts, nominated by governors and certified by the U.S. Department of the Treasury, into which investors can invest in new projects intended to spur economic development in exchange for certain federal tax benefits.
Investing in Opportunity Funds can provide three substantial potential tax advantages to investors:
- 1. Deferral of Capital Gain: A tax deferral for any capital gains rolled over in an Opportunity Fund. The deferred gain out be recognized on the earlier of December, 31, 2026 or the date on which the investment in the Fund is sold.
- 2. Reduction of the Capital Gains Tax Realized: A step-up in basis for capital gains rolled into an Opportunity Fund. The basis of the original investment is increased by 10% if the investment is held by the taxpayer for at least 5 years, by an additional 5% if held for at least 7 years. In other words, if by December 31,2026 an investor has held an investment on an Opportunity Fund for 7 years, then the tax on the initially deferred gain is expected to be reduced by 15%, or reduced by 10% if by then held for only five years.
- 3. No Tax on any Capital Gains for an Investment in Opportunity Fund: In the case of any investment in an Opportunity Fund held by a taxpayer for at least 10 years, the basis of such property shall be equal to the fair market value of such investment on the day that the investment is sold or exchanged. In short, after 10 years, thereafter there would be zero federal capital gains tax on profits from the sale of an investment on an Opportunity Fund.