Benefits of Investing in Opportunity Zones, TCJA

The Opportunities Zones program enacted with the Tax Cuts and Job Act of 2017 offers three tax incentives for investing in certain low-income communities through a qualified Opportunity Fund: temporary deferral, step-up in basis, and permanent exclusion of capital gains.

Under this provision, gain from the sale of any type of property that produces capital gains can be temporally deferred for up to 8 years (by 12/31/2026). If you meet certain holding requirements, you may be able to permanently exclude (1) up to 15% of the original capital gain amount and (2) the entire gain from a subsequent disposition of the qualified investment (i.e. investment in the qualified opportunity zone funds).

Investments held 5 years: basis in the capital gains reinvested is increased by 10%. For example $100 of capital gains is reinvested into an Opportunity Zone fund and held for 5 years, selling in 2023. Basis is increased to $10 and the taxable amount is reduced to $90 ($100 minus $10). The investor will owe $21 in tax on the original capital gains (23.8% of $90). Assuming a 7% annual growth rate, the investor will owe $10 in tax (23.8% of $40) on the Opportunity Zone investment’s capital gain. *

Investments held 7 years: basis in the capital gains reinvested is increased by 15%. For example $100 of capital gains is reinvested into an Opportunity Zone fund and held for 7 years, selling in 2025. Basis is increased to $15 and the taxable amount is reduced to $85 ($100 minus $15). The investor will owe $20 of tax on the original capital gains (23.8% of $85). Assuming a 7% annual growth rate, the investor will owe $15 in tax (23.8% of $61) on the Opportunity Zone investment’s capital gain. *

Investments held 10 years: taxable amount of the capital gains reinvested is reduced by 15% and no tax is owed on appreciation. For example $100 of capital gains is reinvested into an Opportunity Zone fund and held for 10 years. Tax owed on the original $100 is deferred until 2026, basis is increased to $15 and taxable amount is reduced to $85 ($100 minus $15). The investor will owe $20 of tax on the original capital gains (23.8% of $85). No tax is owed on Opportunity Zone investment’s capital gain. Assuming a 7% annual growth rate, the after-tax value of the original $100 investment is $176 by 2028. *

Unlike the deferral treatment under Section 1031 like-kind exchange, as long as you invest the entire capital gain on the original sale into a Qualified Opportunity Fund within 180 days, you can take cash out from the original sale and still defer the entire amount of gain related to that sale.

These Opportunity Zone incentives are available to any type of taxpayer (individual, estate, trust, corporation, partnership, etc.) but there are many criteria that must be met. Please consult your financial advisor.


*Source: Economic Innovation Group, 2018 and Arizona Commerce Authority

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Daliah Bui

Author: Daliah Bui

Daliah Bui is a Senior Tax Manager with BeachFleischman PC. She is a member of the Financial and Professional Services, Hospitality, Large Taxpayers, and Multi-state service groups, and she also specializes in complex federal and state tax issues. more