Part I: Investing in Opportunity Zones | Part II: Structuring Opportunity Zone Funds
The Tax Cuts and Jobs Act created a significant new economic development tool offering income tax deferral and exclusion opportunities to promote investment in low-income communities. For the investor, tax is deferred on initial gain and tax on future appreciation is potentially eliminated. This new program is intended to incentivize and reward taxpayers who make long-term investments in low-income communities designated by the Treasury Department as “Opportunity Zones.” Opportunity Zones now exist in every state and, in fact, every major city has at least one Opportunity Zone. The tax benefits offered by the Opportunity Zone program are compelling and available to nearly all taxpayers. Unlike other tax deferral provisions of the Internal Revenue Code such as Sec. 1031 ‘like-kind exchanges’, the new Opportunity Zone program is potentially available to any taxpayer seeking to defer the recognition of federal income tax resulting from the sale of appreciated assets such as stocks or real estate. Under this exciting new program, there are no like-kind, like-class or holding period requirements for the property sold. Potentially any taxable gain from the sale of appreciated property is eligible.
Investments in Opportunity Zones are made through newly-minted investment vehicles called “Opportunity Zone Funds”. At a high level, the concept is straightforward. A taxpayer sells appreciated property and, within 180-days, contributes the gain from the sale (referred to as a “Qualified Gain Amount”) to an Opportunity Zone Fund in exchange for an eligible Opportunity Zone Fund interest. The Opportunity Zone Fund uses investor capital to invest in one or more Opportunity Zone businesses or property, either directly through the acquisition of assets or indirectly through a subsidiary partnership or corporation.
Income tax deferred through a reinvestment into an Opportunity Zone Fund remains deferred until the earlier of the year in which the taxpayer disposes of its interest in the Opportunity Zone Fund or 2026. To encourage long term investment in Opportunity Zones, the Qualified Gain Amount ultimately subject to federal income tax is reduced by 10% for a taxpayer who holds its interest in the Opportunity Zone Fund for at least five years, and by an additional 5% (for a total of 15%) for a taxpayer who holds its interest in the Opportunity Zone Fund for an additional two years (seven years total). Given the 2026 statutory deferral sunset, taxpayers desiring to obtain the 15% tax reduction for satisfying the seven-year holding period will need to complete their Opportunity Zone Fund investments by the end of 2019. Similarly, taxpayers desiring to obtain the 10% tax reduction will need to complete their Opportunity Zone Fund investments by the end of 2021.
Taxpayers satisfying an even longer holding period qualify for one more tax benefit: an exclusion. If a taxpayer holds the interest in the Opportunity Zone Fund for at least ten years, the taxpayer will not recognize any gain on the post-acquisition appreciation of its interest in the Opportunity Zone Fund. The gain is excluded from the taxpayer’s income in the year of realization.
Although the tax benefits offered by the Opportunity Zone program are compelling, the Opportunity Zone legislation indirectly limits the types of businesses that Opportunity Zone Funds can invest in. This means that Opportunity Zone Funds are well-suited to limited types of business activities including certain real estate development projects as well as “brick and mortar” business operations with considerable assets, employees or infrastructure. Opportunity Zone Funds will not be appropriate for all investors, but for many taxpayers will offer a new tax-incentivized investment vehicle intended to reallocate capital to low income communities.
This newsletter is the first in a two-part series examining the Opportunity Zone legislation. Part two of this newsletter will address structuring Opportunity Zone Funds, operating an Opportunity Zone Fund, and provide practical guidance as to selecting permissible qualifying Opportunity Zone Fund investments.
For more information on this newsletter and McLaughlinQuinn LLC’s tax planning practice, contact Cory J. Bilodeau, Esq., Partner, at (401) 655-2203 or via email at
Upcoming Seminar
Opportunity Zones: An Incredible Opportunity to Reduce Taxes and Invest Locally
Friday, December 14, 2018 from 8 am to 12:30 pm
Location: Providence Mariott - Downtown
Host: McLaughlinQuinn LLC
Speaker: Cory J. Bilodeau, Esq.
The landmark tax reform efforts of 2017 ushered in new Internal Revenue Code Sec. 1400Z-1 and 1400Z-2. These late additions to the tax reform efforts create a powerful tax saving tool designed to redirect investor capital into low income communities. At this seminar, we will discuss the Opportunity Zone program, the tax benefits it offers, and the various requirements necessary to invest. This seminar will provide practical guidance to implement Opportunity Zone planning in 2018 and beyond including:
- Detailed analysis of the recently released Opportunity Zone Proposed Regulations.
- Discussion of the tax benefits offered by the Opportunity Zone legislation including both income tax deferrals and exclusions.
- Guidance to identify what taxable gains can be deferred through Opportunity Zone investments and how to achieve deferral.
- Strategies for structuring Opportunity Zone Funds – permissive Treasury Regulations extend this exciting opportunity to a wide class of taxpayers.
- Strategies for identifying and structuring real estate investments in Opportunity Zones – including compliance with the new Proposed Regulations’ working capital rules.
- Who can establish an Opportunity Zone Fund.
- Combining Opportunity Zone investments with federal and state tax credits.
Click here to Register for Opportunity Zones: An Incredible Opportunity to Reduce Taxes and Invest Locally.