Incentives Explained

[vc_row][vc_column][vc_column_text]If you invest your capital gains into an opportunity fund in 2019 you get 3 tax incentives:

1. Deferral of tax liability on your 2019 gain until 2026
2. Reduced tax liability from your 2019 gain of up to 15% when you are taxed in 2026, and
3. Zero tax liability on your opportunity fund investment, as long as you hold it for at least 10 years.

Through the Opportunity Zone Program, investors are able to inject capital gains into low-income communities and promote long term economic growth through a variety of investment vehicles. The following key features of the Program make this an extremely attractive investment for a wide range of investors.

• Flexibility
  • Funding Flexibility: Can fund a variety of equity investments all across industry sectors to match the needs of the local (low-income) community.
  • Structural Flexibility: Allowing intermediaries that raise and deploy capital to be nimble in responding to the market opportunity.
  • Approval process: No Pre-approval process allows the cost, complexity and time needing to deploy the capital to be less than that of past programs.
• Scalability
  • Investors are allowed to reinvest their capital gains without any up-front subsidy or allocation.
  • No fixed cap on the amount of capital that can be channeled through this program.
  • No limit to the amount of Opportunity Funds

No limit on the number of Opportunity Zones that can receive investments in a given year.[/vc_column_text][vc_empty_space height=”30px”][vc_single_image image=”1931″ img_size=”full” alignment=”center”][vc_empty_space height=”30px”][vc_column_text]

Tax Deferral

Subchapter Z provides incentives for investments in qualified opportunity zones (QO Zones) by means of temporary capital gain deferrals and ultimately permanent exclusion from gross income of capital gains, if certain requirements are met.

Under the new law, any gain from the sale or exchange of property by a taxpayer to an unrelated person, that is invested in a qualified opportunity fund (QO Fund), within 180 days of the sale of that property is excluded from gross income until the earlier of the date the investment in the QO Fund is sold or December 31, 2026.

The law requires only the gain to be reinvested into the Qualified Opportunity Fund, not the total proceeds. This is a variation from other tax deferral tools such as 1031 exchange. The gain deferred can be any gain (e.g., short-term, long-term and Section 1231 gains) in connection with the sale of property.

Assuming the taxpayer holds its investment in the Qualified Opportunity Fund until December 31, 2026, the gain subject to tax is the lesser of the fair market value of the property at the time of the event or the original deferred gain. Taxpayers will need to value their interest in the Qualified Opportunity Fund in order to capture the correct gain.[/vc_column_text][vc_column_text]

Abatement

The taxpayer’s basis in the Qualified Opportunity Fund is initially zero

If the investments in the fund continues to be held after 5 years, the basis will be increased by 10% of the deferred gains

If held after 7 years the basis will be increased by an additional 5%.

Therefore, if a gain on the sale of property is reinvested in a QO Fund within the required timeframe, taxpayers may be able to decrease the taxable portion of the originally deferred gain by 15% (an overall basis step up of 15%) if investment is held up to 7 years.[/vc_column_text][vc_column_text]

Exclusion

Investments held for 10 years or more, any appreciation of the asset from the time of the initial investment into the Qualified Opportunity Zone through the sale of the investment, will have no capital gains tax associated with it.[/vc_column_text][/vc_column][/vc_row]