According to the 2018 Distressed Communities Index, distressed communities have the largest number of housing vacancies in the country.  In addition, distressed areas are also falling behind economically with a loss of over 13,000 businesses.  As the nation continues to rebound from the downturns of 2008 and beyond, steps were put in place to return residents and businesses back into these areas with the Tax Cuts and Jobs Act of 2017.  This brought about the Opportunity Zone Tax Incentive.  Under this program, distressed areas are nominated and approved for what is called a Qualified Opportunity Zone.  As of today, there are 8,700 listed zones within the United States.  This designation will continue until January 1, 2029.

The tax savings come when you decide to invest in these areas using a Qualified Opportunity Fund.  The IRS defines this to be “any investment vehicle which is organized as a [U.S.] corporation or a partnership for the purpose of investing in a Qualified Opportunity Zone Property (QOZP).”  The one mandate here is that at least 90% of the assets must be held within the QOZP.  When using capital gains to purchase stock, partnership interest, or property in these areas, investors can defer their capital gains taxes until the investment is sold or exchanged, or until December 31, 2026.

Let us now drill a little deeper into the types of benefits and requirements. 

The 3 primary tax savings offered are temporary deferral, partial exclusion, and elimination.  The temporary deferral applies to if you hold your property until the December 31, 2026 time and then pay taxes.  Partial Exclusion is granted when you have the property longer than 5 years and that includes a 10% exclusion of the deferred gain.  Longer times have bigger savings and at 7 years, this would become a 15% exclusion.  With Elimination, after 10 years, there then becomes the option to have all tax payments cleared.

Requirements for the capital gains ar as follows:

  1. Invest in the Qualified Opportunity Fund within 180 days from the sale of the asset
  2. Have equity interest
  3. Elect deferral during the tax year the gains would become income

Now that the details are laid out, let’s discuss the immediate impact.  Currently, the project is still relatively new and final regulations are due Spring 2019.  With that said, there is a major benefit to deferring capital gains taxes, and the IRS and Treasury Department are fully behind this program pushing investments into these areas.