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Opportunity Zones are the hot new investments of 2019. Before you convince your high net worth clients to invest, let’s understand some basics. The 2017 Tax Cuts & Jobs Act created the Opportunity Zone Program. The program allows each state to designate a community as a Qualified Opportunity Zone. The idea is to identify economically distressed communities that can use an investment boost to spur job creation and economic development. Once the state selects the community, it must be certified by the Department of the Treasury. Nationally, about 8,700 Qualified Opportunity Zones have been selected and certified.
Why should your rich clients care about poor communities? Aside from the fact that one should help those in need, there’s a substantial tax savings they can take advantage of. This is how it works: If the taxpayer has a recognized gain, they have 180 days from the date of the sale of appreciated property to invest the gain into a Qualified Opportunity Zone Fund. The fund will then invest in Qualified Opportunity Zone Property.
Investing in an Opportunity Zone Fund provides the following tax benefits:
Tax deferral through 2026 - Any taxable gain invested in an Opportunity Zone Fund is not recognized until December 31, 2026 or until the interest in the fund is sold or exchanged, whichever comes first.
Stepped-up basis - A taxpayer who defers gains through an Opportunity Zone Fund investment receives a 10% step-up in tax basis after five years. If the taxpayer holds the investment for two more years (total of seven years), the stepped-up basis is 15%. So, if a taxpayer invests $10 Million, they will only pay tax on $8.5 Million if they keep the investment for seven years. Since the gain is recognized on December 31, 2026, the taxpayer must invest by December 31, 2019 to be eligible for the 15% stepped-up basis. If they miss the 2019 deadline, they must invest by December 31, 2021 to be eligible for the 10% stepped-up basis.
Tax exemption on appreciation – If you hold the investment for more than ten years, you can exempt the gain created by the appreciation of the investment. This is huge. Let’s say for example your client invests $10 Million into the fund. This investment grows to $15 Million. The $5 Million gained while in the Opportunity Zone Fund will be exempt from tax!
Although investing in a Qualified Opportunity Zone Fund may lead to a substantial tax savings, there is always risks associated with any investment. At the end of the day, the fund is just another investment vehicle with the potential for market loss. Due diligence is key with any investment, and a Qualified Opportunity Zone Fund is no different.
Tony Martinez
Author Bio: Antonio Martinez is the VP of Business Development for LTPA. In 2004 Tony earned a full-ride scholarship to the University of California, Berkeley. Tony majored in Engineering and was involved in various leadership and volunteer roles. Upon graduation, Tony joined the LTPA with a goal of building a national brand. As VP of Business Development, Tony has led the exponential growth of the organization and organized various events throughout the country. In 2014 Antonio became an Enrolled Agent with the goal of representing immigrant taxpayers before the IRS.