Opportunity Zones (OZs), a product of the Tax Cuts and Jobs Act of 2017, are designed to stimulate new investment in low-income communities nationwide. The program enables investors to harvest capital gains and defer payment of federal gains tax by investing those gains as equity into a “new activity” within an OZ within 180 days. A new activity will generally take the form of a real estate development, but it could include an operating company as long as the funds can be traced to funding the new activity.
Under the new tax law, each state selected 25 percent of its low-income census tracts, as defined under the New Markets Tax Credit program, to be OZs. States were also able to designate up to 5 percent of tracts contiguous to low-income tracts as qualifying areas. The OZs will remain fixed from the date of designation through the close of the tenth calendar year and can be quickly identified on mapping websites.
Investors initially benefit from deferral of capital gains tax, which effectively becomes an interest-free loan from the federal government to fund approximately 20 percent of the OZ investment. The capital gains tax on the original investment is due at the earlier of the disposition of the OZ investment or with the federal tax return covering Dec. 31, 2026. The capital gains tax on the original investment is reduced 10 percent if the OZ investment is held for five years and another 5 percent (15 percent in total) if held seven years or longer. The greatest incentive though is to hold the OZ investment for 10 years, which results in no capital gains tax on the new OZ investment, including the potential for no recapture of depreciation taken during the 10-year holding period.
Article originally appeared on areadevelopment.com