28 Jun Investments in Opportunity Zones: A Tax Opportunity

Posted at 15:38h in Tax by
Allison McGaha is the Vice President of Finance and Accounting here at RBS. Allison oversees accounting and finance functions for both RBS and RBS Evolution. With over 20 years of experience, we are grateful for Allison’s vast knowledge and ability to effectively communicate financial information to non-accountants with a direct and clear approach. Here, Allison provides a brief overview of the “Opportunity Zones,” which may be of interest to investors who are interested in deferring capital gains taxes.

Opportunity Zones were created as part of the Tax Cuts and Jobs Act on December 22, 2017 and create a significant opportunity for investors to defer capital gains tax owed. We wanted to update you on this legislation and how it applies to taxpayers hoping to defer capital gains taxes.

Background information:
  • Opportunity Zones were established to promote the economic development of economically-distressed areas (“low income census tracts”)
  • The original legislation was vague and has been clarified over the past 18 months, most recently in April 2019
  • A Qualified Opportunity Fund is an investment vehicle that’s set up as either a partnership or corporation for the purpose of investing in eligible property located in a Qualified Opportunity Zone
    • The tax benefits apply, even if you don’t live, work or have a business in an Opportunity Zone. Simply invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain

      • The Details:
      • What gains qualify for tax deferral? Any gain that is treated as capital gain on property disposed of after 12/31/2017 (gains that result from a sale to a related party do not qualify)
      • The taxpayer has 180 days to invest the gain in a Qualified Opportunity Zone Fund
      • Leased property within an Opportunity Zone that is improved can qualify

      The Benefits and Risks: 

      Benefits:

      • Immediate deferral; you don’t pay tax today
      • You can get a permanent deferral on 15% of your gains if you can hold for 7 years or more
      • You can get a permanent deferral on 100% of the accretive gains if you hold 10 years or more

      Potential Disadvantages:
      • 7-10 years is a long time; you must be a patient investor
      • Your cash is largely locked up until the point that you can produce operating profits or gains in the fund (some exceptions exist)

      Potential Risks:
      • Investors are betting on the program to work; in these economically distressed areas, will the values go up?
      • What will the market be for these investments in 10 years? Will they be marketable?

      Need more information?
      • Over the next few months, the Treasury Department and the Internal Revenue Service will be providing further details, including additional legal guidance, on this new tax benefit. More information will be available at Treasury.gov and IRS.gov
      • Additionally, we encourage you to speak to your tax advisor/CPA about Opportunity Zones and capital gains deferral
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