Tax Benefits of the Opportunity Zone Program

In the Tax Cuts and Jobs Act of 2017, Congress established an Opportunity Zones program to increase long-term investment in community development programs. Congress hoped by designating the low-income communities as qualified opportunity zones that capital would flow to the communities to develop property and expand business in these areas, which would reduce poverty and increase employment. There are roughly 8,700 opportunity zones throughout the United States.

The program offers a tax incentive for investors by allowing them to contribute their capital gains within 180 days of the sale into Opportunity Funds. When the tax bill was signed into law, investors and tax preparers alike were left with many questions on the specifics of the program. On October 19, 2018, the Internal Revenue Service issued the first round of guidance on the new community development incentive.

Under the program, if a capital gain is invested in a Qualified Opportunity Fund within 180 days of realizing the gain, then the gain is not included in income until the investment is sold, or December 31, 2026, whichever is sooner. There are three potential separate tax benefits – (1) temporary deferral, (2) permanent exclusion of either 10% or 15%, or (3) permanent exclusion of post-acquisition appreciation.

In summary, if an investor has the ability to invest its capital gain in a Qualified Opportunity Fund within 180 days of the sale, then the tax due on the gain can be deferred for as long as eight years, decreasing the gain by up to 15% and escaping tax on future appreciation if held at least 10 years. Another set of guidance soon to be issued by the Internal Revenue Service will address questions about the operations of the fund.

While the issues are complex, the benefits can be very compelling. Below are maps of Mississippi and Tennessee showing which communities have been designated as opportunity zones. As your tax advisors, we remain fully committed to guiding you toward maximum efficiency in your tax and financial planning and will continue to keep you informed. Please consult your HORNE tax advisor with any questions.