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The Tax Saving Opportunities in an Opportunity Zone

November 15, 2018

One relatively undiscovered provision of the recent Tax Cuts and Jobs Act provides many potential tax saving opportunities for individuals with capital gains. A Qualified Opportunity Fund (QOF) was established to encourage investment in Opportunity Zones, which are located in low-income areas throughout the United States.  The new law was designed to help revitalize these impoverished areas and enhance the economic environment.

Construction site

Individuals, partnerships, and corporations can all take advantage of the law by reinvesting an unlimited amount of capital gains into a QOF within 180 days of the gain being realized. This includes short-term and long-term gains from the sale of property, stock, or any other type of capital gain. In addition, only the gain needs to be invested, allowing the participant to recover the cash from their initial investment at the time of sale.

The potential tax savings come in three stages. 

  1. The ability to defer capital gains until the end of 2026 or the sale of the QOF, whichever comes first.
  2. A 10% increase in basis of the deferred gain after 5 years, and an additional 5% after 7 years.  At the earlier of the end of 2026 or the sale of the QOF, taxes must be paid on the original gain minus any basis increase that has taken place.
  3. The potentially largest benefit occurs once the fund is held for 10 years or more. At that time there is an unlimited increase in basis of the QOF, meaning that no tax will be paid on any increase in the value of the fund.

Investments need to be made by December 31, 2019, in order to take full advantage of this opportunity due to the 2026 deadline on deferring the original gain. This investment has the potential to be a great way to get tax savings and invest in building a stronger community at the same time. Contact our firm with any questions you have regarding this opportunity.

   

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