What are the Benefits of Qualified Opportunity Zones?

At the end of last year, the media and various news outlets were buzzing with information about tax reform. It was reported to be the most significant overhaul of the tax code since the mid-1980s. For individuals, it meant a reduction in tax brackets, a doubling of the standard deduction and the phase-out of several itemized deduction opportunities. For businesses, it reduced the overall tax rate to 21%, repealed AMT, expanded the opportunity to claim bonus depreciation and eliminated the opportunity to make like-kind exchanges for any asset other than real estate. While several of the tax saving vehicles were modified or eliminated there were also new opportunities created. Many taxpayers may be surprised to learn about the tax saving opportunity facilitated by the creation of Qualified Opportunity Zones. To help clients, prospects and others understand the program and its tax saving potential, Wilson Lewis has provided a summary of key details below.

Opportunity Zone Incentive Program

Opportunity zones are a new community development program created by the Tax Cuts and Jobs Act of 2017 designed to incentivize investment in economically challenged urban and rural communities across the country. The program works by allowing any taxpayer (within a designated time frame) the opportunity to defer paying tax on the capital gains from the sale of property and other assets (such as stocks) if the gains are invested in an Opportunity Zone. It’s important to note that investment is not directly permitted, but taxpayers must make the investment with Qualified Opportunity Funds, which are primarily focused on investing in designated zones.

Key Tax Benefits

The program creates key tax benefits for those who participate and rewards those who keep their investment for the longest period possible. These include:

• Deferral of Gain – Conceptually like 1031 exchanges, taxpayers are provided a vehicle in which they can defer the gain the sale of property by investing in qualified opportunity funds. Regulations require participating taxpayers to recognize the gain on the date the opportunity zone investment is terminated or December 31, 2026, whichever date is earlier.
• Basis Step-Up – Participants can receive a step-up in basis for capital gains that are invested. The basis is increased by 10% if the investment is held for five years and an additional 5% if the investment is held for seven years. This creates the opportunity to exclude 15% of the original gain from taxes if the investment is held for the appropriate length of time.
• Permanent Exclusion Opportunity – Regulations allow for a permanent exclusion from taxable income on capital gains on the sale of exchange of an investment in an opportunity fund if it was held for 10 years. Please note this applies only to gains made after the opportunity fund investment was made.

Program Details

Taxpayers have until 180 days after the sale of their property to make an investment in a Qualified Opportunity Fund. The election must be made at the time of investment. As mentioned above, the maximum deferral period for a Qualified Opportunity Zone is 10 years with associated tax benefits available at seven and five years. Investment can be held for a period longer than 10 years but as of today, there are no associated tax benefits. A list of additional insights can be found by visiting the IRS Frequently Asked Questions page.

Opportunity Zones in Georgia

According to the IRS, there are 12 zones in DeKalb County, five zones in Cobb County, 27 zones in Fulton County and three in Gwinnett County. An interactive map is available for those who are interested in receiving specific information about the location of the in-state zones. It’s important to note that a taxpayer doesn’t need to live or own a company in an opportunity zone to take advantage of the tax benefits. The only requirement to participate is to make the investment with a Qualified Opportunity Fund.

Contact Us

This new program creates important tax deferral opportunities for taxpayers with capital gain tax concerns. The tax benefits of participation are compelling and create an opportunity worth exploring. Before making any investments it’s important to speak with a qualified advisor who can assess your situation and provide the proper guidance. If you have questions about Qualified Opportunity Zones or need assistance with other tax planning issues, Wilson Lewis can help. For additional information please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.