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Opportunity Awaits the Investor

In this article we are going to open some doors to take a high-level view on the potential “opportunities” that exist with relatively newly created Opportunity Zones.

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In this article we are going to open some doors to take a high-level view on the potential “opportunities” that exist with relatively newly created Opportunity Zones.

Someone once told me that opportunity does not knock, it presents itself when you beat down the door. In this article we are going to open some doors to take a high-level view on the potential “opportunities” that exist with relatively newly created Opportunity Zones. Opportunity Zones were created by the massive tax overhaul that took place at the end of 2017. Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities by providing tax incentives.

An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the U.S. Treasury. Opportunity Zones are still relatively new. The first set of Opportunity Zones, covering parts of 18 states, were designated in April of 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories. This includes parts of Central Massachusetts and specifically, Worcester.

The way to invest in a Qualified Opportunity Zone is via a Qualified Opportunity Fund (QOF). A QOF is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.

Many taxpayers may want to set up their own QOF. To become a QOF, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return. You can get the tax benefits, even if you don’t live, work or have a business in an Opportunity Zone. All you need to do is invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.

Virtually any entity or individual required to report capital gains can receive Opportunity Zone benefits. The investment offers three potential tax benefits:

  1. A deferral of the tax on the original gain until the earlier of either (a) the date the taxpayer sells or exchanges its investment in the QOF, or (b) December 31, 2026.
  2. A reduction of the tax on the original gain: (a) 10 percent discount if the QOF investment is held for five years by December 31, 2026, or the date of disposition, if earlier; (b) an additional 5 percent discount (15 percent total) if held for seven years by December 31, 2026.
  3. No taxable gainson the QOF investment if held for 10 or more years. 

The potential tax savings from an investment in a QOF can be significant. By way of example, let’s say you had the foresight to invest $400 in Amazon back in 1997. Further, let’s say that investment is now worth $1,000,000 and you have a gain of $999,600. You could sell the stock and pay the tax on the gain or you could sell it and reinvest the proceeds into a QOF within 180 days of sale. If you choose to sell your stock and reinvest the proceeds in a QOF the gain can be deferred until 2026 and is reduced by 15%. If you hold your investment in the QOF for 10 years, the gain on your Amazon stock in this example is reduced by 15% and any subsequent appreciation in the QOF is not subject to any federal tax.

In October of 2018, the Treasury Service and Internal Revenue Service issued proposed regulations that provide more detailed guidance for the new Opportunity Zone incentive, including guidance that almost any capital gains qualify for deferral. As always, you should consult with your own tax advisor and investment advisor.

Worcester has always offered its residents and visitors plenty of opportunities; now, smart investors can also help the area continue to strengthen its economic viability while benefitting individually as well.

 

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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