Defer your Capital Gains Tax by Investing in Opportunity Zones

Practice Areas

By Satya Yeruva

Overview

The 2017 Tax Cuts and Jobs Act (TCJA) introduced a tax incentive program called “Opportunity Zones.” Opportunity Zones are low-income areas chosen by the US government for investment. New investments in an Opportunity Zone may qualify for tax deferral on capital gains.

On October 19, 2018, the Treasury Department issued proposed regulations on the Opportunity Zones program.

What are Qualified Opportunity Funds (QOF)?

Qualified Opportunity Funds (QOFs) are investment vehicles created for the main purpose of reinvesting capital gain monies within Opportunity Zones. QOFs must generally be a partnership or corporation.

Since TCJA’s passing in 2017, individuals and businesses can defer capital gains taxes when they invest in Qualified Opportunity Funds (QOFs).

There is no shortage of Opportunity Zones to invest in. There are over 8,700 qualified Opportunity Zones throughout the 50 states and US territories.

What Changes Were Proposed for QOF Investment?

In October 2018, the Treasury Department proposed allowing nearly all capital gains to qualify for tax deferral through QOF investment.

Additionally, the proposal issued clear guidelines on how soon investments must be made after capital gains are earned.

How Does Opportunity Zone Investment Work?

Capital gains are profits earned by an individual or business investor when they sell an asset, such as property or an investment. If the capital gains from a sale are reinvested within 180 days into Qualified Opportunity Funds (QOF), the investor may elect to defer all or a portion of their capital gains tax until December 2026.

If the investment is not sold, the capital gain tax liability on the initial investment will be reduced by 10% after five years and by 15% after seven years. After 10 years, the new capital gain taxes generated from new investment in QOFs are reduced to zero.

Conclusion

Investors who have earned or expect to earn capital gains should consider reinvesting them in a Qualified Opportunity Fund to take advantage of tax benefits. Consult with an experienced Chugh accountant today for tax planning guidance.