3 Tax-Saving Benefits of Opportunity Zones
What are Opportunity Zones?
Opportunity Zones were added as part of the Tax Cuts and Jobs Act in December 2017, and are economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state, and that nomination has been certified by the federal government.
In May 2018, Governor Malloy announced the federal approval of 72 zones in 27 municipalities across Connecticut. To see an interactive map of the opportunity zones in CT click this link - http://arcg.is/01rivi
How to get started.
To participate, investors need to acquire interests in a partnership, corporation, or limited liability company that hold qualified opportunity zone property. Taxpayers also can self-certify by investing funds to finance commercial and industrial real estate, housing, infrastructure, and current or start-up businesses. Investors would roll over their capital gains into these investments in order to defer and potentially eliminate the capital gains tax.
Qualified entities must hold at least 90% of their assets in the qualified zone property, and real property much be “substantially improved” to qualify as an Opportunity Fund project. To self-certify, a taxpayer completes a form, and attaches that form to the taxpayer’s federal income tax return for the taxable year.
3 tax benefits from investing capital gains.
- 8-Year Capital Gains Tax Deferral. When an investment gain is rolled into an Opportunity Fund, no tax is paid in the initial year. It will instead be deferred for 8 years, and in the meantime, the gain has been invested and will be earning an additional return.
- 15% Capital Gains Tax Reduction. When the gain is initially invested, the basis is considered to be zero. After 5 years, the basis is increased to 10% of the initial investment. After 7 years, the basis becomes 15% of the initial investment. (If $20,000 gain is invested, basis becomes $2,000 after 5 years, then $3,000 after 7 years).
- 100% Capital Gains Exclusion. If the amount is left in the Opportunity Fund for 10 years, all of the gain earned in the fund will be tax free. For example, if $20,000 is invested and it appreciates at 7% per year, then in year 10 you would receive back your $20,000 initial investment plus an additional $20,000 in tax-free capital gains. (85% of the initial investment will still be taxed in year 8, so the entire amount withdrawn in year 10 will be tax free!)
Plus, there is no limit on how much gain can be invested and deferred. Opportunity Zones can be a great tax planning tool to use for not only deferring capital gains today but also increasing your investment tax-free for tomorrow.
Want to learn more about Opportunity Zones? Call The Innovative CPA Group at 203-489-0612. Or, click HERE to contact us online.