With so many changes to the U.S. Tax Code, newly created Opportunity Zones received less attention as a tax-advantaged investment strategy than other provisions in the Tax Cuts and Job Acts. With the potential to defer Federal taxes on any recent capital gains through 2026, reduce that tax payment by up to 15% and possibly pay zero taxes on potential profits on an investment held for 10 years, we think this lesser-known tax savings strategy is worth a closer look.
What are Opportunity Zones? Essentially, they have designated areas in economically-distressed communities to spur on growth through private dollars as opposed to tax dollars. Localities that qualify must be nominated by the state and certified by the Secretary of the U.S. Treasury via his delegation of authority to the IRS. According to the IRS, the first set of Opportunity Zones, covering parts of 18 states, were designated in April of 2018. Today, Opportunity Zones can be found in parts of all 50 states, the District of Columbia and five U.S. territories. You need not live, work or have a business in an Opportunity Zone in order to invest, simply an established Qualified Opportunity Fund (QOF).
What’s a QOF? A QOF is an investment vehicle set up either through a partnership or corporation for investing in eligible property. A limited liability company (LLC) that chooses to be treated either as a partnership or corporation for federal tax purposes can also set up a QOF. If you have questions specific to setting up a QOF for your business, we can provide you with more detailed answers.
What happens after a QOF is established and an investment is made? According to the IRS, investors can then defer tax on any prior gains invested in the QOF until the earliest date on which the investment in a QOF is sold or exchanged, or on December 31st, 2026. If the QOF investment is held for more than 5 years, there is a 10% exclusion of the deferred gain. If held over 7 years, the 10% grows to 15%. If the investor holds the investment for at least 10 years, he or she is eligible for an increase in basis of the QOF investment equal to its fair market value on the date the QOF investment is sold or exchanged.
At Tax Saving Professionals, we have assisted thousands of clients with tax-advantaged investment strategies over the past 18 years and would be honored to help you keep more of your money in your pocket. Give us a call at (772) 257-7888 or click on our contact form today.