Opportunity zones, which were created pursuant to the Tax Cuts and Jobs Act on December 22, 2017, have now been established in each of the fifty states, the District of Columbia, and five United States territories. Opportunity zones are certain designated economically-distressed census tracts wherein new investments may be eligible for preferential tax treatment.Related Services
Investors can benefit from investing within Opportunity Zones in three ways.
First, investors can obtain deferred tax treatment of existing capital gains which are re-invested in a “Qualified Opportunity Fund”. The deferral lasts until the earlier of the date the investment is sold or December 31, 2026.
Second, if the investment in a Qualified Opportunity Fund is held for five years, 10% of the deferred capital gain is excluded from taxation. If the investment is held for seven years, 15% of the deferred capital gain is excluded from taxation.
Third, if an investment in a Qualified Opportunity Fund is held for ten years, the investor gets a step up in basis on the investment to the fair market value on the date the investment is sold. In other words, there is no capital gain tax on any gain realized on an investment in a Qualified Opportunity Fund if the investment is held for ten years or more. This can mean substantial tax savings to the investor.
While Opportunity Zones are fairly straightforward in concept, the devil is in the details. An investor must comply with all of the requirements of the Act in order to obtain preferential tax treatment. Otherwise, any benefit may be lost. Among other requirements, the “Qualified Opportunity Fund” must invest in eligible property located in a “Qualified Opportunity Zone,” as defined in the Act. In sum, whether you are an investor looking to invest in an existing Qualified Opportunity Fund or you are looking to establish a new Qualified Opportunity Fund, it is essential to have legal counsel that is knowledgeable about Opportunity Zones to ensure that all requirements are met to achieve the preferential tax treatment.
MacDonald Illig’s business transactions attorneys are knowledgeable with respect to Opportunity Zones and are able to help you achieve your investment strategy. Please contact any member of our business transactions group to get started.