Real Estate Development and Opportunity Zones
Opportunity Zones are a recent community development program added in the Tax Cuts and Jobs Act of 2017, to encourage long-term investments in low-income communities nationwide. The Opportunity Zones program provides a tax incentive for investors to re-invest their unrealized capital gains from sold capital assets into Opportunity Funds that are dedicated to investing into Opportunity Zones which are nominated by the governors of every U.S. state and territory, and designated by the Department of the Treasury. Opportunity Zones are overwhelmingly low-income, high-poverty places. However, they can also be placed in any located designated by the Federal or State governemnt. (Additionally, it was rumored that Amazon planned to build HQ2 in Long Island City in what would have been designated Opportunity Zone, providing Amazon with an additional tax break).
The Opportunity Zones program offers tax incentives for investing in low-income communities through a qualified Opportunity Fund. The tax incentive is for investors to re-invest their unrealized capital gains into Opportunity Funds within 180 days. A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone. Capital gains tax deferral, step-up in basis, and capital gains tax elimination are the three tax advantages investors may see with investment in Opportunity Zones.
The first of the three tax advantages is a temporary deferral of capital gains taxable income from a sold asset for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
The second is a step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thus excluding up to 15% of the original gain from taxation.
The third is a permanent capital gains tax elimination from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
DISCLAIMER: The information provided here is for general informational purposes only. It should not be considered a recommendation or personalized advisory advice. Before entering into a Qualified Opportunity Fund transaction, one should seek the guidance from his/her attorney or expert in field.
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