Are you concerned about being stuck with large capital gain this year? What if there was a way to avoid it? How about for the next 10 years?
If you’re facing beefy tax payments because of capital gains, this tax break may be worth exploring. The program is part of the Tax Cuts and Jobs Act. It’s called the Opportunity Zone Tax Incentive, and along with saving you money, it’s true purpose is to promote investors to push money into low-income areas to increase their value.
Where Are These Opportunity Zones Located?
An Opportunity Zone is a community nominated by the state and certified by the Treasury Department as qualifying for this special program. Approximately 8,700 Opportunity Zones qualify nationwide. All 50 states have certified zones that qualify, as do Washington DC and US territories.
How Does The Program Work?
Taxpayers who wish to take advantage of this program because they are facing large capital gain after the sale or exchange of appreciated property have a limited amount of time in which to take action. They have 180 days from the date of the sale or exchange to invest into a Qualified Opportunity Zone Fund. The fund is a vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property.
What happens to the return of principal? Taxpayers may reinvest it along with recognized capital gain. Only the portion attributable to the capital gain will be eligible for the tax exemption on further appreciation of the Opportunity Zone Investment.
Is the Opportunity Zone Fund Similar to Other Investments?
Just as in other investments, the value of an Opportunity Zone Fund investment may increase or decrease over the holding period. The investor may pay income on this investment. Keeping in mind that the purpose of the program is to improve designated low-income areas, the fund is expected to continue investing in the improvement of the property.
What About Cash Flow?
Once the property improvements are complete, the property may be leased or sold to third parties. At this time, cash flow may occur.
Are There Any Risks?
Investing in The Opportunity Zone Tax Incentive may or may not have risks associated. It’s new, and the IRS and Treasury Department are still gathering information on how the fund will work over time. Because of this, the level of risk is difficult to assess. However certain potential risks have been identified.
Among other things, risks may include market loss, liquidity risk, and business risk. Before you make any plans, note that investment in the new tax incentive may or may not be appropriate in your case. It’s best to consult with a tax professional to determine it it’s a fit for you. Contact one of our tax advisors for information.