Opportunity Zones Offer Tax Incentives for Investments in Low-Income Communities

 Posted on September 14, 2018 in Taxation Law

A new federal initiative seeks to infuse low-income areas with investments for new projects and enterprises by offering tax breaks to investors. Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act in December 2017.

Under the new rules, Qualified Opportunity Zones are low-income census tracts selected by state governors and certified by the Department of the Treasury. A Qualified Opportunity Fund is an investment vehicle that invests at least 90 percent of its capital in Opportunity Zones. 

How Do Opportunity Zones Incentivize Investors?

When an investor makes a gain from selling a capital asset to an unrelated party, the investor can put the amount of the gain into a Qualified Opportunity Fund and defer payment of capital gain tax. This step must be taken within 180 days of the disposition of the sale or exchange.

If the investor’s interest is held for five years in an Opportunity Fund, the investor will be given an increase in the basis of his/her investment equal to 10 percent of his/her original investment of deferred gain. If investors hold their interests in the fund for seven years, they will receive another increase in their basis of 5 percent of their deferred gain that was originally invested in the Opportunity Fund. If investors hold their interests in the fund for ten years, their basis in the Opportunity Fund interest will be the fair market value, and any appreciation will not be taxed.

One important detail: investors holding an interest in a fund on December 31, 2026 must pay taxes on their deferred gain. The amount of taxes due will take into consideration the increases in the investor’s basis that were received for retaining the interest for five or more years. This may not coincide with a liquidity event, and investors should plan accordingly.

Contact a San Jose, CA Tax Incentive Attorney

At John D. Teter Law Offices, our San Jose tax lawyer stays abreast of tax incentive programs that may be of interest to our clients. These programs can offer huge tax savings when executed properly. However, there may also be pitfalls as well as unknowns when it comes to new tax rules. An experienced tax law attorney can help you navigate such issues.

When making investments, having the proper tax and legal advice from the beginning will pay dividends in the long run. To schedule a consultation, call our office at 408-866-1810.

Source:

https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

https://eig.org/opportunityzones/about

https://www.accountingtoday.com/opinion/opportunity-zones-an-innovative-investment-vehicle-created-by-the-tax-cuts-and-jobs-act