Federal Tax Reform Opportunity Zones
What are Opportunity Zones?
Tax reform legislation presented a significant opportunity for investors to defer capital gains tax owed. The benefits are for those capital gains that arose in the last 180 days or prospectively in 2018 and future years.
The establishment of newly created Federal Opportunity Zones was added to the Internal Revenue Code as new IRC Sections 1400Z-1 and 1400Z-2. The Opportunity Zones offer an opportunity for investors to defer tax on capital gains by investing in Qualified Opportunity Funds, which in turn make investments in property (stock, partnership interest or tangible personal property) in the designated Opportunity Zones.
What are Opportunity Funds?
Opportunity Funds are investment vehicles (partnerships or corporations) created for the main purpose of reinvesting monies realized from an event triggered by a sale resulting in a capital gain within those designated Opportunity Zones. As of July 31, 2018 regulations have not yet been published by the Treasury or the IRS.
Who qualifies for Opportunity Zones?
Each state has nominated low-income census tracts and subsequently approved by the Treasury. All U.S. States, the District of Columbia, and five territories have qualifying census tracts now available to qualify for investment.
Per the Internal Revenue Bulletin 2018-28 issue by the Internal Revenue Service on July 9, 2018, they have designated 8,849 census tracts, with California being the highest with 882 and ten states each with 25 tracts.
What are the benefits to be gained?
- Any tax due on capital gains invested in the Opportunity Fund within the 180-days is deferred until the fund is divested, or December 31, 2026, whichever occurs first.
- If investment in Opportunity Fund is held at least 5 years, there will be a 10 percent basis step up, while if the investment is held at least 7 years, the basis step up will be 15 percent.
- If the investment in the Opportunity Fund is held for at least 10 years, the taxpayer is exempt from paying any capital gain on the sale of the newly created Opportunity Fund investment.
- The new program offers a deferral of short or long-term capital gains tax due, a potential reduction of short and long-term capital gains tax due, and lastly a potential permanent exclusion from taxable income for any capital gains generated in any qualified investment made in the Opportunity Funds.
The MFA Companies Tax Team has extensive knowledge on this topic and is positioned to assist in structuring opportunity zone funds and to help with making investments within the designated zones. For more information, please contact us.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.