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Advantages of Investing in Qualified Massachusetts Opportunity Zones

Following the passing of the Tax Cuts and Jobs Act, low-income and distressed zones called ‘Qualified Opportunity Zones’ are designed to provide federal tax benefits to those investing funds and businesses within the zone.

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Following the passing of the Tax Cuts and Jobs Act, low-income and distressed zones called ‘Qualified Opportunity Zones’ are designed to provide federal tax benefits to those investing funds and businesses within the zone.

It’s been a little more than a year since the Tax Cuts and Jobs Act was passed in December of 2017, a regulation that contained new Internal Revenue Codes aimed at spurring economic growth and business in specific communities designated as distressed and/or low-income. Dubbed Qualified Opportunity Zones, these sectors, which are designated through census tracking, provide federal tax benefits to those investing in funds and businesses within the specified boundaries of the Qualified Opportunity Zone.

Unlike programs in place designed to stimulate private investment in low-income communities, Opportunity Funds can self-certify without the need of approval from the U.S. Treasury Department. As such, Opportunity Funds are managed entirely in the private market with the administration of the funds falling solely on the shoulders of fund managers rather than government agencies or investors. Moreover, there is no cap on the amount of capital that can be invested into qualified Opportunity Zones through the program, translating into no arbitrary limit on the extent the program can assist in reshaping depressed communities.

The governor of each state has the authority to nominate up to 25% of its low-income census tracts (LICs) for designation as Opportunity Zones. Individuals can garner favorable tax treatment on their capital gains by investing in these designated areas, 138 of which were nominated by Governor Baker in April of 2018. As of May 2018, these tracts – most of which are primarily located in Boston, Fall River, New Bedford, Pittsfield and Worcester – have been certified by the U.S. Treasury; inasmuch, incentives can only be claimed for investments within these specific census tracts.

In brief, there exist three incentives for investors, all of which accumulate over the life of the investment.

Temporary Deferral

Investors can temporarily defer capital gains on income reinvested into Opportunity Funds. The deferred gain must be recognized upon the investor exiting the fund or on December 31, 2026 – whichever comes first.

Step-Up in Basis

Investors remaining within an Opportunity Fund for a minimum of five years are eligible to reduce tax liabilities related to the original capital gains by 10%. If the investment is held for seven years, they can take an additional 5% reduction for a significant total of 15%.

Permanent Exclusion of Fund Gains

If an investor maintains their investment in an Opportunity Fund for 10 years, any gains from the Fund are exempt from taxation.

The investor/taxpayer has an obligation to pay tax, based on the amount of the deferred gain in the taxpayer’s taxable year – which includes December 31, 2026, or earlier if the investment is sold prior to the end of 2026. The amount subject to tax will be the lesser of the deferred gain – as modified by the aforementioned 5%, 10% or 15% basis adjustments – or the excess of the fair market value on that date over the deferred gain – again as modified by the previously referenced 5%, 10% or 15% adjustments.

It should be underscored that an investment in a Qualified Opportunity Fund must generally occur with a 180-day period beginning on the date of the sale that generated the capital gain. For standard stock sales, that timetable begins on the actual trade date.

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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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