If you’ve been following the news, you have probably heard major buzz around the phrase “Opportunity Zone.” That’s probably because the Tax Cuts and Jobs Act of 2017 contained a special program called the “Qualified Opportunity Zone Program” which gained national attention because it was specifically designed help build affordable housing in low-income areas around the country. Definitely a buzz-worthy topic in our opinion.
So, let’s get to the basics.
What exactly is an Opportunity Zone?
As defined by the IRS, an Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Certain areas can qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
The Qualified Opportunity Zone program was developed to help kickstart economic development and job creation by investing in businesses in low-income areas. The Tax Cuts and Jobs Act of 2017 allows significant tax incentives to investors, motivating them to invest into Opportunity Zones. By investing in opportunity zones, investors can defer and even potentially reduce tax on capital gains, which is invested into properties located in the opportunity zones.
How does the program work?
This program encourages and rewards investors who have capital gains from the sale of appreciated assets by letting them defer the capital gains tax when reinvesting them into a Qualified Opportunity Fund. In other words, The Opportunity Zones program grants investors a huge opportunity to help improve low-income communities while reducing the tax liabilities in the investment.
What is a Qualified Opportunity Fund?
A Qualified Opportunity Fund is an investment vehicle set up as either a partnership or corporation for investing in certified properties located in a Qualified Opportunity Zone. The S2A Opportunity Zone, LP, is an example of this.
What exactly are the tax benefits?
Investors who engage in a Qualified Opportunity Fund can benefit from three capital gains tax benefits:
Deferment of gains: An investor could invest their capital gains into the Opportunity Fund, so the tax due on those gains is deferred until the investor sells his interest in the fund.
Step-up in Basis: The investor can choose to hold the investment for five years, at that point, the payment of $200,000 is completely deferred, plus the investor gets a 10% step-up in basis on the original deferred.
Elimination: If the investors holds their interest in the fund for more than 10 years, they will pay no capital gains tax on the appreciation of the asset.
What does this all mean?
Opportunity Zone Funds are a huge opportunity to revitalize low-income areas and make an impactful difference. Once areas are revitalized, they’re proven to see a decrease in crime, increase in property values and become overall more desirable neighborhoods. Additionally, revitalization efforts trigger an increase in job creation for local businesses. Opportunity Zone Funds encourage investors to invest into these zones, improving communities and underprivileged areas. In return for that investment, they are rewarded with tax savings that can reap sizable rewards.
If you’re interested in learning more, click here to read the IRS’s Frequently Asked Questions about Opportunity Zones.
If you’re interested in being part of S2A’s efforts to help improve low-income communities through this program, you can view our recent press release on our involvement Here.