In a new program established by the 2017 Tax Cuts Act, funds from capital gains sells will receive preferential tax treatment if invested in certain economically distressed communities, known as “Opportunity Zones.” The criteria for an opportunity zone are determined by the Treasury Department and are applicable in all 50 states and Washington D.C. At the time of this writing, there are 252 opportunity zones in North Carolina alone.
In similar fashion to the existing 1031 Exchange, investors are allowed 180 days from the sale of property or stock to invest into an Opportunity Zone Fund. The fund(s) will then reinvest this money into one of the zones, as available. Once construction and/or revitalization within the pre-existing community is complete, rents and other cash payments will be paid to the fund and distributed amongst shareholders, similar to any other investment with a positive cash flow. Firms across the nation are now coming together to create these funds and their respective development plans. As with any other property, there exists the potential for the investment to either increase, or decrease in value.
There are rules dictating which types of buildings and structures can be erected within one of these opportunity zones. Luxury locations such as golf clubs and country clubs are not permitted. Neither are businesses that encourage gambling, or liquor stores. The goal of an opportunity zone is to revitalize and uplift the existing community while avoiding gentrifying it to a point that out-prices and displaces the current residents.
So where does the capital gains exemption come into play?
If invested in an opportunity fund, the capital gains tax that would have been paid this year would be deferred until December 31st 2026 under the new tax code.
If the funds from the capital gains are held in the investment for 5 years, there is a 10% tax savings, 15% for 7 years.
If the investment remains in the opportunity zone for 10 years, there is a step-up in cost basis for the difference in the sale price of that asset. Should the investment be held for the full ten years, you would have only paid 85% of the previous capital gains tax bill, and any increase in value to the property would incur no capital gains at all – the most advantageous part of the plan. During those years you would also potentially be receiving investment income from the fun. To take advantage of the full 15% step-up, investment must be made by December 31st, 2019.
To learn more about opportunity zones, click here:
For further details on opportunity funds, view updates from the Department of the Treasury and the IRS here:
To speak with a retirement specialist, click here.
This information is for educational purposes only and not to be taken as direct investment advice. Olympic Golden Retirements is not a CPA or tax accounting firm. Olympic Golden Retirements does not offer investment in Opportunity Funds at this time, as the guidance so regarding is yet to be finalized while new rules and regulations are being developed.