Opportunity Zones are a new tax incentive coming from the Tax Cuts and Jobs Act (TCJA). These zones were created with the intent to connect private investment capital to economically distressed communities. Designated opportunity zones have been assigned in South Dakota, with an opportunity zone residing right in downtown Rapid City (see map). These Qualified Opportunity Zones for all 50 states can be found on an interactive map at the www.cdfifund.gov website.
Opportunity Zones are a mechanism through which investors with capital gain tax liabilities can invest in Qualified Opportunity Funds (QO Fund) to receive preferential tax treatment. These funds can be used to make real estate investments and to purchase equity in businesses. Investors have the possibility to defer all gains from the sale of any property, possibly reduce the amount of gain recognized and in many instances permanently exclude the appreciable gain in a QO Fund from taxation.
The investor must invest in a fund within 180 days after the sale or exchange of the capital asset. The fund entity can be a partnership, a corporation or a limited liability company. Eligible gains include sale of stocks, real estate, business interests, etc. Like property does not need to be exchanged to qualify for the deferral, for example, an investor can sell stock for a gain, invest in a QO Fund and purchase real estate.
QO Funds are separate entities established by the investor group to transfer gain and purchase a new investment. The current law allows for self-certification of an entity as a QO Fund. There is no maximum cap on the amount which can be invested.
Let’s look at an example. On January 2, 2018, ABC Corp. sells property to an unrelated party and has a resulting gain of $1 million, which ABC Corp then reinvests in InvestFund, a qualified opportunity fund, on March 30, 2018. ABC defers the gain until December 31, 2026, at which time ABC must recognize the deferral gain due to TCJA requirements even though the investment in the fund has not been sold. ABC Corp sells its investment in InvestFund on April 2, 2030, for $3.5 million. Since ABC has held the investment for 10 or more years, it may elect to treat the basis as $3.5 million and no gain is recognized.
Those expecting to pay large capital gains, real estate developers and business buyers should all take note. Call us today with questions.