Opportunity Zones
Opportunity Zone legislation represents a once in a generation bi-partisan incentive for long-term investment in low-income urban and rural communities. First created as part of the 2017 Tax Laws, OZ rules offer tremendous tax incentives, including the deferral and potential reduction of capital gains tax payments, and the avoidance of capital gains on the OZ investment.
What are Opportunity Zones?
Opportunity Zones are economically challenged communities where new investments may be eligible for preferential tax treatment. A total of 8,761 Opportunity Zones in all 50 states plus the District of Columbia and five territories have been designated and approved by the Department of Treasury. Approximately 35 million people live in designated Opportunity Zones.
Source: U.S. Department of Treasury
Investing Benefits
Tax Deferral
- Deferral of the original long-term capital gain tax until the earlier of the following:
(i) the date on which an Opportunity Fund investment is sold
(ii) December 31, 2026 - Reinvestment into an Opportunity Fund must occur within six months of the initial long-term capital gain being realized.
Reduced Tax Liability
- If the Opportunity Fund investment is held for at least five years, the basis for the original investment is increased by ten percent of the original capital gain.
Tax-Free Investment
- If the Opportunity Fund investment is held for at least ten years, at the time of sale, there is no long-term capital gain tax due on the Opportunity Fund investment.
Lifecycle of Qualified Opportunity Fund Investment
ASSET SALE
- Original stock is sold for $120
- Original stock basis is $20
- Realized long-term capital gain (original gain) is $100
OPPORTUNITY FUND INVESTMENT
- Original gain is reinvested into Qualified Opportunity Fund within 180 days of realization
- Investor reinvests $100 original gain into Qualified Opportunity Fund
YEAR 5
- Increase basis by 10% of the original gain
- 10% x $100 = $10 step-up in basis
- New basis for initial stock is $30 ($20 + $10)
YEAR 6
- Taxes due on original gain, minus the 10% reduction in capital gain tax due to the step-up basis
YEAR 10
- Upon the sale of the Qualified Opportunity Fund investment, no capital gain tax is due
Qualified Opportunity Fund vs. Traditional Fund Investment
AFTER TAX IRR
The difference in after tax IRR between a Qualified Opportunity Fund investment and a traditional fund investment without special capital gain treatment.
AFTER TAX MULTIPLE
The difference in after tax multiple between a Qualified Opportunity Fund investment and a traditional fund investment without special capital gain treatment.
