Among the new provisions of the Tax Cuts and Jobs Act that took effect on December 22, 2017, were opportunities funds, which provide tax incentives for investing in targeted areas in the United States. By offering investors substantial federal tax advantages that are only available through the new program, Top Opportunity Zone Funds promote economic development in these select communities, known as Opportunity Zones.
- What Are The Tax Benefits of An Opportunity Zone Investment?
- Deferral of capital gains. An Opportunity Fund provides a tax deferral for capital gains rolled over. If you sell your investment in the fund before December 31, 2026, you will receive the deferred payment.
- Reduction of capital gains. Capital gains rolled into Opportunity Funds receive a step-up in basis. For investments held by the taxpayer for at least five years, the base is increased by 10%, and for investments held for at least seven years, the basis is increased by 5%. A tax reduction of 15% will apply to an investment in an Opportunity Fund after seven years, or 10% if held only five years.
- Elimination of capital gains. Taxpayers who hold investments in Opportunity Funds for at least ten years shall have the basis of such investments equal to their fair market value on the date they sell or exchange them.
- In what ways does an investment in an opportunity zone qualify?
A Qualified Opportunity Zone (QOZ) property is a property that has been certified by the U.S. The property owners must invest at least 90 percent of their assets in QOZ properties. It is necessary to organize corporations and partnerships to invest in distressed properties in urban and rural areas.
Only a few Top Opportunity Zone Funds invest exclusively in qualified opportunity zones’ businesses, real estate, and assets. Incentives for loans are not available, and there must also be extensive rehabilitation work needed on the properties in the fund.
- Are Opportunity Zones Open To Everyone?
These funds are appropriate for investors with large capital gains bills. Accredited investors are currently the only ones eligible to invest in opportunity zones. A typical investor has a net worth of at least $1 million, excluding their primary residence, and earns at least $200,000 annually.
- Here’s how you can invest in opportunity zones.
It is possible to finance Opportunity Zones in two ways: either by creating your fund or by investing in one made by another party. Economic opportunity zones can be invested inefficiently through funds. Investments within Opportunity Zones are eligible for tax benefits; the investment must be in a qualified business or property that meets the eligibility criteria, such as commercial real estate or agricultural projects within the Opportunity Zone.
- How do Opportunity Zone Funds determine what assets qualify?
It is necessary to invest in Opportunity Zones after December 31, 2017. It is permissible to sell assets to a fund in which you also participate, but the laws limit the seller to 20% or less. Fund assets must also consist of 90% opportunity zone business property or equity interests in subsidiaries that own opportunity zone business property. The project must be a new development or renovation that doubles the value of an investment property.
Other Factors To Consider
Many questions remain unanswered regarding the Opportunity Zone program, as the U.S. Department of Treasury has not yet abided by the Tax Cuts and Jobs Act of 2017. As the IRS continues to clarify regulations, additional opportunities will likely emerge.
Having not received any guidance from the U.S. Department of the Treasury on many of the remaining questions regarding the Opportunity Zone program, there is uncertainty about the program bringing those investments to market soon. However, no investment is suitable for all investors.
It would be best if you researched whether OZFs are appropriate for your overall investment strategy and tax planning. Prospective investors should consult a tax advisor before investing in top opportunity zone funds. If you have any questions, feel free to contact our professionals.