There’s a provision in the recently enacted 2017 Tax Cuts and Jobs Act that should be of interest to investors because of its tax implications.
The Opportunity Zones program grants a considerable tax incentive for investors to re-invest their unrealized capital gains into an Opportunity Zone Fund.
The federal program aims to boost long-term investments in designated low-income communities, or “opportunity zones.” These areas are nominated by state governors and certified by the US Treasury Department.
Investors put their money in a qualified opportunity fund with at least 90% of its assets in qualified opportunity zone property. A qualified opportunity fund is an investment vehicle formed as a corporation or partnership with the intention of investing in qualified opportunity zone property.
Let’s say an investor gained a profit from the sale of company stock. Before December 21st, 2019, a capital gain can be deferred into a Qualified Opportunity Fund if reinvested within 180 days in a designated area. The same amount has to be spent on improvements.
If the profit is reinvested in an Opportunity Zone fund, the investor can defer capital gains taxes until 2026. If the Opportunity Zone fund shares are held for five years, the deferred gain decreases by 10 percent. There’s another 5 percent discount if the shares are held for 7 years.
The tax on the reduced original capital gain must be paid by 2026 at the latest. Finally, if held for 10 years, there will be zero capital gains tax assessed on the asset appreciation.
The Opportunity Zones program is bound to lure many non-real estate investors, like those who’ve just sold their stock shares, as this makes investing a lot more attractive to them. It’s a great opportunity since there’s hardly ever a time or situation to take a profit tax-free, except on the sale of a primary residence.
The Empire State Development Corporation lists the approved tracts in New York. Some of the areas listed as Opportunity Zones in New York City are unexpected, like Midtown West, having both affordable and luxury housing.
Low-income neighborhoods in designated areas stand to benefit from the program since new investments will pour in and will likely transform and uplift these areas.
At this point, there are still many unanswered questions about the program. It’s best to consult with your attorney or accountant before taking any action. But because of substantial benefits to investors, it will definitely bring about a significant shift in the real estate market. So be on alert for upcoming announcements from the IRS and be ready to take advantage of the Opportunity Zones program.