One of the most interesting wrinkles of the Tax Cuts and Jobs Act was the creation of Opportunity Zones.
According to the IRS, Opportunity Zones are particular distressed communities throughout the country in need of economic revitalization. Under a nomination process completed in June 2018, 8,761 communities in all 50 states, the District of Columbia, and five U.S. territories were designated as qualified Opportunity Zones. Investing in an Opportunity Zone can provide substantial tax benefits to an investor, namely deferral on capital gains tax.
Investors may defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in a zone, making an election after December 21, 2017, and meeting other requirements.
Generally, to qualify for deferral, the amount of a capital gain to be deferred must be invested within 180 days of the gain being realized into a Qualified Opportunity Fund (QOF). The QOF must be an entity treated as a partnership or corporation for Federal tax purposes and organized in any of the 50 states, D.C. or five U.S. territories for the purpose of investing in qualified opportunity zone property.
The QOF must hold at least 90 percent of its assets in qualified Opportunity Zone property. Investors who hold their QOF investment for at least 10 years may qualify to increase their basis to the fair market value of the investment on the date it is sold, which would effectively eliminate any capital gains tax on the appreciation. Plus, anyone who holds the QOF investment for 7 years will exclude 15% of the original gain from being taxed. Holding the QOF for 5 years yields a 10% exclusion.