What are Opportunity Zones?
The Opportunity Zone legislation passed as part of the Tax Cuts and Jobs Act (TCJA) in December of 2017.
The OZ program is designed to encourage investors with capital gains liability to put these funds to use by making long-term investments in communities that need capital investment. OZs were born as a rare bipartisan provision and late addition to the TCJA. Capital gain liability can be deferred by reinvesting it in a qualified opportunity fund (QOF) within 180 days of realizing the gain. There is no dollar limit on how much gain can be deferred.
There are more than 8700 Opportunity Zones through out the US and QOF are required to invest at least 90% of their assets into qualifying assets within these communities.
The OZ Program offers three benefits:
1) The previously realized capital gain tax liability is deferred until December of 2026.
2) The realized capital gain is reduced via a step up in cost basis of 10% after 5 years.
3) After 10 years any capital gain liability from the Qualified Opportunity Fund can be forgiven via a 100% basis step up though December 31, 2047.
The first two benefits are designed to mitigate the pain of realizing the original capital gain. It is the third, however, that has the most potential to affect after-tax returns in the long run. The Opportunity Zone incentives are designed to reward qualifying investments that are economically successful and long term.