Opportunity Zones/Funds
The Tax Cuts and Jobs Act (TCJA) of 2017 is pretty much in place now that the Federal Government is once again funded. There will still be lots of “clarifications” coming out. One of the programs created by the TCJA is Opportunity Zones (OZ). These are areas across the nation that are recognized as low income areas. Utah has 46 Opportunity Zones ( https://opportunitydb.com/location/utah/ ). The US Government is offering incentives to investors to make substantial investments into real estate in these Zones. Essentially the Government is allowing investors to defer capital gains taxes, if the investor will use the capital gains dollars to invest in these Zones. The vehicle for taking advantage of this opportunity is called an “Opportunity Fund” (OF).
An Opportunity Fund is any investment vehicle organized as a corporation or a partnership to invest in Opportunity Zones and must hold at least 90% of its assets in Opportunity Zone assets.
Taxpayers may temporarily defer the recognition of capital gains that are invested in Opportunity Zones. Investments in Opportunity Zones, through Opportunity Funds, that are held for at least five years are eligible for capital gains tax reductions or exemptions.
This is a vehicle to defer capital gains. Capital gains are the measure for taxation by the Internal Revenue Service (IRS).
TAX BENEFITS
One interesting aspect of this program is, capital gains may come from any appreciated investment, such as a stock portfolio. It can then be invested in a Zone without a tax consequence. There are, of course, lots of rules. But the essence of the deal is--liquidate an appreciated asset, use the basis (the difference between what you paid and the appreciated value upon sale) to roll into an OF. The deal is structured so when you have held the OF for 5-years you get a “stepped-up basis” of 10%. (reduction of the capital gains by 10%). If you hold the OF for 7 years, it bumps up to 15%. Note: There is an expiration date for taking the 7-year option. The program expires in 2026, so you need to invest THIS YEAR. If you hold the OF investment for a full 10 years, the original capital gains money becomes tax exempt. You will likely have capital gains created by the OF, which should also be tax exempt (2047 Expiration). We are waiting for clarification.
Do not do something stupid. Of course, you will still perform your due diligence! Does the investment make sense without the tax benefit? Also, this is a good time to loop your attorney into the planning.
This is a unique opportunity. Be part of an historical event. Run the numbers (or have us run the numbers) to see if the tax benefit makes sense, to see if appreciation seems likely, as you will be tying up funds for a long time.
TESTS
If you buy vacant ground, you must build upon it. If you are buying a rehab for $100,000, you must put an additional $100,000 into the project. The additional funds must be cash. The cash does not need to be tax deferred funds, but these funds will not be under the umbrella of the tax deferral program.
Start your research here: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx You have 180-days to invest your capital gains into an OF.
Give us a call before you liquidate any assets--but ready to start structuring the Fund or when you have chosen a syndicator you want to invest with.
FINAL WORD
This is one of these opportunities that are attractive to con-artists because a lot of money is moving around. Be extra careful in your due-diligence!
BE THE ROAR not the echo!
Feel free to share this post with a Salt Lake County business associate or client you know who could benefit from our assistance. While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.
Warmly,
Janet Behm
(801) 278-2700
Utah Real Estate Accountants