Simply understanding the mechanisms of Opportunity Zones creates a major barrier to entry for more socially-minded investors.
TAX BENEFITS
The opportunity zones incentive is a new community tool established by Congress in the tax cuts and jobs act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. Opportunity zones provide a tax incentive for investors to re-invest their unrealized capital gains into dedicated opportunity funds.
To make profit, essentially a taxpayer must sell an asset and generate a capital gain. The taxpayer then puts the capital gain into a Qualified OZ fund. There is ultimately delay and reduction of taxes owed to the government - if held for 10 years, that taxpayer can pay ZERO capital gains tax on the new investment in fund. If you hold your investment in some of the OZ from funds, you essentially pay no tax on your returns, which could lead to a 30-40% increase in your annualized return.
WHAT IS AN OPPORTUNITY ZONE?
Opportunity Zones are defined as "economically - distressed communities where new investments under certain conditions, may be eligible for preferential tax treatment."
From urban neighborhoods to rural communities, every county in Florida has at least one designated Opportunity Zone. For many of those communities, capital is desperately needed for economic development and housing projects that are affordable. With its deep experience in affordable housing development, the Florida Housing Coalition can assist your community in developing a comprehensive strategy for attracting and deploying Opportunity Zone capital.
HOW DOES AN OPPORTUNITY ZONE WORK?
Deferral: Investors receive a temporary defferal of tac capital gains reinvested into Qualified Opportunity Funds. The reinvestment must be made within 180 days of the sale creating the gain, or in certain situations, within 180 days of the end of the taxpayer's tax year. Special rules apply to a taxpayer's distributive share of gains reported on a Schedule K-1. Generally, the period of deferral ends upon the earlier date of the sale of the reinvestment in the QOF. There are also other events that may accelerate inclusion of the originally deferred gains and terminate the OZ benefits.
Reduction: The reduction benefit provides investors a step-up in basis, the amount of which is contingent on the length of time they maintain the investment in the qualifying fund. If the investment is held for 5 years, 10% of the original gain is eliminated. If the investment is held for 7 years, 15% of the original gain is eliminated. \
Exclusion: If the investment in the qualifying fund is held for at least 10 years, any appreciation on the investment can be permanently excluded from taxation at the election of the taxpayer. If the qualifying fund, that is not a C corporation, sells any of its assets, investors with a 10-year hold can generally exclude their share of any resulting gain on the asset sale, with the exception of gain associated with the sale of inventory.
