Opportunity Zone Tax Incentives To Stimulate Investment In Designated Communities Across USA
Now that the Tax Cuts and Jobs Act (TCJA) of 2017 is the law of the land, the provision establishing Opportunity Zones is resonating with investors. The Opportunity Zone program aims to stimulate investment in economically depressed communities throughout the United States by offering capital gains tax benefits.
The Opportunity Zone program proposes (1) the reduction and deferral of tax on existing capital gains when profits are reinvested in a designated low income community, and (2) the elimination of the capital gains tax on any profits generated from the Opportunity Zone investment. It is noteworthy that existing capital gains from any asset class, with limited exceptions, may be reinvested in an Opportunity Zone and that only gains from the sale of the asset need to be reinvested.
To qualify, any reinvestment of profits must be made through special purpose vehicles known as Opportunity Zone funds. Opportunity Zone funds are being created at a frenzied pace by a host of finance and investment professionals, but anyone may establish his or her own Opportunity Zone fund. The creation of an Opportunity Zone fund is subject to a self-certifying procedure that is accomplished by forming an entity and following newly-issued regulations.
Some of the potential benefits derived from investing in an Opportunity Zone include:
Capital gains taxes on current profits are deferred when the gains are reinvested during the relevant time period;
If the reinvested profits are held for five years, ten percent of the original capital gains can be excluded from taxation, increasing to a fifteen percent exclusion if the investment is held for seven years;
Any gains separate and apart from the reinvested profits are not subject to any taxation if the investment is held for at least ten years.
The Opportunity Zone program is intended to bring capital into America’s economically-disadvantaged communities, with Treasury Secretary Steven Mnuchin forecasting $100 billion in investments. The program’s aim is to lift up distressed communities by offering generous incentives to investors who may provide capital to finance projects or establish business operations in Opportunity Zones, which is compelling.
Given the newness of the Opportunity Zone legislation, federal authorities continue to issue guidance and interpretation of regulations governing the program. As with all investments, there is no substitute for consulting with an attorney and tax professional before making any investment decisions. This note is intended as an introduction to the existence of the Opportunity Zone program and should not be construed or relied upon as legal advice.