Articles

November 08, 2018 | Posted in:

Federal Opportunity Zones

In December 2017, the Tax Cuts and Jobs Act was signed into law. The bill represented the first major tax reform since the 1980s. Some of the most notable pieces of the bill were the reduction of tax rates and limits on tax deductions, but one of the little publicized aspects of tax reform was the creation of federal opportunity zones (IRS Notice 2018-48). If your income includes capital gains, you stand to take advantage of this new program.

NJ Opportunity Zones

NEW JERSEY OPPORTUNITY ZONES BY CENSUS TRACT | ChooseNJ.com

You may be familiar with state run opportunity zones. In the state’s designated areas, you’re likely to see state tax incentives for investing in that location. For example, you may see reduced sales tax rates or property tax abatements to encourage running a business in certain city. The federal program passed as part of the tax reform bill has similar incentives but on a different scale since there are neither federal sales taxes nor property taxes. Investing in these opportunity zones will provide federal income tax benefits as long as certain requirements are met.

 

Tax Planning via Opportunity Funds

If your income includes capital gains, you stand to take advantage of this new program. Investors with capital gains have the ability to invest in qualified opportunity funds and defer income taxes. A qualified opportunity fund is an investment created for the main purpose of investing money within a designated opportunity zone.  To date, New Jersey has 75 municipalities that qualify as federal opportunity zones. Opportunity zone investments in real estate are subject to a substantial rehabilitation requirement.

Here’s how it works…

  • You sell an investment and realize a capital gain.
  • Within 180 days, you invest the amount of the capital gain in a qualified opportunity fund.
  • You make an election to defer the tax on the amount of the gain with your federal income tax return.

 

Deferring Capital Gains

How long can you defer the gain? Well, that depends on how long your investment in the qualified opportunity fund lasts. The longer you let the investment sit, the greater your tax benefit. The election to defer the gain lasts until either the investment is sold/exchanged or December 31, 2026, whichever is earlier. However, you may get additional tax benefits if you hold the investment beyond the December 31, 2026 date.

Here’s what I mean:

 

Length of Investment Tax Benefits
Less than 5 years Original gain deferred until sold.
5 to 7 years Original gain deferred until sold and reduced by 10%.
7 to 10 years Original gain deferred until earlier of sale or Dec 31, 2026 and reduced by 15%.
More than 10 years Original gain deferred until Dec 31, 2026 and reduced by 15%. Gain from subsequent sale completely tax free.

 

 

As an example, assume you have a $100,000 capital gain in early 2018 and reinvest in a qualified opportunity fund within 180 days. Here is a timeline of potential scenarios and the tax benefits associated with each:

  • If you sold the investment in 2022, you would have to show the $100,000 in capital gain income on your tax return. The gain would have been deferred four years.
  • If you sold the investment in 2024, you should have to show $90,000 in capital gain income on your tax return. The gain would have been deferred six years and you would receive 10% of the gain tax free.
  • If you sold the investment in 2025, you should have to show $85,000 in capital gain income on your tax return. The gain would have been deferred seven years and you would receive 15% of the gain tax free.
  • If the investment isn’t sold by December 31, 2026, you will show $85,000 in capital gain income on your tax return. The gain would have been deferred eight years and you would receive 15% of the gain tax free. If in 2030 the investment is sold for $250,000, your gain of $150,000 ($250,000 sale price less $100,000 initial investment) would be completely tax free.

 

Consult with a CPA

Many taxpayers are unfamiliar with the federal opportunity zone program. It is a new program that offers significant tax benefits to anyone earning capital gain income. If you want to learn more about the program or think you may be able to take advantage of it, please contact an Alloy Silverstein accountant and advisor at 856.667.4100.

 

Author:

Associate Partner
 
Ren III provides tax, accounting, and advisory services to a broad range of clients, with a specialty for manufacturers, title insurance companies, and professional service providers.
View Ren III's Bio →     Follow @R3CPA on Twitter →

JB Financial Associates is now Alloy Silverstein.
This is default text for notification bar