Koreatown opportunity zone
What is an Opportunity Zone?
On December 22, 2017, the Tax Cuts and Jobs Act created a new federal income tax incentive known as the Opportunity Zones Program. An Opportunity Zone is a low-income census tract, nominated by State Governors and certified by the U.S.Department of the Treasury, into which taxpayers can invest in new projects intended to spur economic development and job creation in exchange for significant federal tax benefits.
What is an opportunity fund?
An Opportunity Fund is a new investment vehicle that has been organized as either a corporation or partnership, has undergone the requisite certification process, and holds at least 90% of its assets in an Opportunity Zone property. The Opportunity Zones Program encourages investment in Opportunity Zones by permitting a taxpayer to sell existing appreciated assets and invest the realized gain into an Opportunity Fund within 180 days of realization. The taxpayer is only required to invest the gain from the sale of an investment and only the taxable gains invested in an Opportunity Fund receive the tax incentives.
WHAT TYPE OF INVESTMENTS CAN BE MADE THROUGH AN OPPORTUNITY FUND?
Investments are required to be equity investments (not debt) in businesses or real estate within an Opportunity Zone. Real estate investments are subject to a “substantial improvement” requirement within 30 months of the purchase date. As a result, Opportunity Funds are intended to target development and rehabilitation projects. For example, an Opportunity Fund could invest in a ground-up development of a mixed-use project that includes new retail and workforce housing.
The Opportunity Zone Program is designed to incentivize patient capital investments in low-income communities nationwide. All of the underlying incentives relate to the tax treatment of capital gains and are tied to the longevity of an investor’s interest in an Opportunity Fund, providing the most upside to those who hold their investment for 10 years or longer.
Temporary deferral of capital gain
A temporary deferral of capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the Opportunity Zone investment is sold or December 31, 2026.
Reduction in deferred capital gain tax
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
Elimination of any future capital gain tax on Opportunity Fund investment
A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. In short, zero federal capital gains tax on profits from the sale of an investment in an Opportunity Fund.
The chart below illustrates an investor’s after-tax funds on a 10-year, $1,000,000 capital gains investment in an Opportunity Fund and a traditional fully taxed portfolio, assuming an annual investment appreciation of 10%, and a long-term capital gains tax rate of 23.8% (federal capital gains tax of 20% and net investment income tax of 3.8%).