- Tax reform created an investment program that delivers a tax break on capital gains
- To receive the maximum (15%) tax exclusion, investors need to act by year-end
- There are more than 8,700 designated opportunity zones in the country
The Tax Cuts and Jobs Act (TCJA) created so-called “opportunity zones” to improve communities experiencing economic distress. Taxpayers who invest proceeds of capital gains in these areas can receive tax breaks.
With this program, taxes are deferred on the invested capital gain through the end of 2026, provided the taxpayer holds on to the investment. At that point, the amount of the original gain subject to tax would be reduced. The tax break is 15% if the investment is held for seven years, and 10% for a five-year holding period.
To receive the full 15% tax exclusion, an investor would need to participate by the end of 2019.
What is an opportunity zone?Opportunity zones are geographic areas established by the TCJA to encourage investment in economically distressed urban and rural communities. The goal is to help businesses grow and create jobs. The law designated 8,761 areas across the United States as well as territories. The zones retain this status for 10 years.
There are several requirements for investors:
- The qualified capital gain, within 180 days of sale or exchange, must be invested in a qualified opportunity fund (QOF)
- Eligible taxpayers include individuals as well as corporations, partnerships, real estate investment trusts (REITs), regulated investment companies (RICs), and other pass-through entities
- Investment in a QOF must be equity interest and cannot be a debt instrument
- Funds must meet certain tests on percentage of assets invested within an opportunity zone
A multi-year commitment
- Investors may defer the tax on almost any capital gain up to December 31, 2026
- A taxpayer can defer recognition of the gain until the earlier of (1) the sale or exchange of the taxpayer’s interest in the QOF, or (2) December 31, 2026
- Investors holding the investment for at least 10 years are eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the investment is sold or exchanged
Research and plan ahead
Taxpayers should consider how long they plan to hold the investment in order to benefit from excluding some of the capital gain from taxation. They must also consider any investment risk associated with investing in an underdeveloped area. Researching the community and its potential for a successful redevelopment is key. It is also important to discuss this tax strategy with a professional financial advisor and tax and legal experts who can weigh the benefits and risks.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.