Benefits of Opportunity Zones and 1031 Exchanges
In this article we take a look at what Qualified Opportunity Zones are and the benefits these bring to both investors and communities.
What are Opportunity Zones?
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state, and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service. Opportunity zones then help the economy grow by creating jobs in these distressed communities, while investors receive tax benefits.
The 2017 Tax Cuts and Jobs Act was signed into law in December 2017. Throughout all 50 states, the District of Columbia, and the US territories, there are more than 8,000 Qualified Opportunity Zones designated by the Secretary of Treasury. You can find the full list here.
Taxpayers are able to invest in these Opportunity Zones through Qualified Opportunity Funds (QOP). How do these work and who can qualify for the benefits?
Opportunity Zones mainly function as tax incentives to spur economic growth in undercapitalized communities. If you are an individual or a corporation with capital gains, you can qualify and take advantage of tax deferral. Individuals and corporations must completely fill out Form 8996, Qualified Opportunity Fund, with its federal income tax return. For additional information, see Form 8996 and its instructions. The return with Form 8996 must be filed timely, taking extensions into account. This same form is “used to annually report whether the QOF met the investment standard during its tax year” per the IRS
Benefits of Qualified Opportunity Zones
Investors can take advantage of one or more of the following benefits:
Tax Deferral. You can defer your capital gains tax until you dispose of your assets or not be taxed until the end 2026. Investors can invest existing assets into Opportunity Funds. A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
Step Up. If the investor holds the QOF for at least 5 years, the original investment’s basis increases by 10%; if held at least 7 years, the basis increases by 15%.
Exclusion. For Opportunity Fund investments held at least 10 years, investors will not need to pay taxes on capital gains.
Is Investing in An Opportunity Zone Right for You?
Opportunity Zones are economic development tools that benefit both the investor and the community invested in. As an investor, you may be considering if investing in Opportunity Zones is a good fit for you especially given the tax benefits. To learn more about Opportunity Zones, and Qualified Opportunity Funds, talk to our team at Growth 1031. Our team is a proven source of reliable information, a trustworthy ally in areas of uncertainty, and the standard bearer for client relationships. We serve clients in Los Angeles, New York City, and Chicago. Our 1031 exchange services include delayed exchanges and reverse exchanges, and we’re happy to answer any questions you may have.
