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How can the savvy investor take advantage of the new Opportunity Zone program?

Opportunity Zones have been a hot topic amongst real estate investors over the last several months. Created by the Tax Cuts and Jobs Act, Opportunity Zones were designed to encourage and reward reinvestment of capital gains into low-income communities across the nation. Each state governor was given the opportunity to nominate low-income census tracks as Opportunity Zones (Washington Opportunity Zone Map).

The investment vehicle for investing in Opportunity Zones is referred to as an Opportunity Fund. An Opportunity Fund is a Corporation, Partnership, or Limited Liability Company with at least 90% of its assets in Qualified Opportunity Zones – assets may include real estate, businesses, and business assets.

At their core, Opportunity Funds are a tool for investors to both defer and eliminate capital gains taxes through investment in these low-income communities. The tax incentives of Opportunity Fund investing are threefold:

Capital Gains Tax Deferral: by investing capital gains in an Opportunity Fund, the tax due on those gains is deferred until the earlier of
i) Sale of the interest in the fund
ii) December 31, 2026.

Step-Up in Basis: the investor’s basis in the Opportunity Fund begins at zero, but is incrementally increased 10% after holding for 5 years and an additional 5% after holding for 7 years.

Capital Gains Tax Elimination: on appreciation of the asset after a 10-year hold.

Key Considerations and Take-Aways

  • Opportunity Funds are comparable to a more flexible version of a 1031-Exchange. As a result, an investor will need to liquidate an asset in order invest in an Opportunity Fund.
  • Opportunity Funds represent a valuable tax strategy that can greatly benefit savvy investors with considerable capital gains.
  • When investing in an Opportunity Fund, an investor will have 180 days from the sale of a capital asset until reinvestment into the Opportunity Fund.
  • Opportunity Funds, and the assets therein, can be leveraged like any other asset.

Give us a call to start the conversation today.