The clock is ticking on a major benefit of the Opportunity Zone program.
On December 31, 2019, the 15 percent capital gain tax discount benefit under the Opportunity Zone regulations expires as the seven-year timeframe necessary to receive such 15 percent capital gain tax discount benefit by the year 2026 becomes unattainable.
This will leave the remaining benefits of the Opportunity Zone program for tax payers at a 10 percent capital gain tax discount benefit on the taxes to be paid in 2026 on capital gains invested into Qualified Opportunity Zone Funds (QOZF) and an exemption on any new gain realized from the investment on the capital gain initially invested after 10 years.
While the loss of the five percent capital gain tax discount benefit may seem small in comparison to the overall benefits, it still it a third of the upfront deferral benefit, and it has taxpayer investors on the hunt for QOZFs with viable projects in Opportunity Zones.
Opportunity zones are the hottest new investment opportunity in America. Now it seems as if everyone with capital gains to shield is trying to invest in them.
Established by the 2017 Tax Cuts and Jobs Act in an effort to incentivize investment in economically struggling areas throughout the United States, opportunity zones offer investors access to significant tax benefits, including the ability to defer their capital gains from taxable income through reinvestment. More critically, investments in opportunity zones that are held for at least ten years are exempt from income tax.
The Puget Sound Business Journal recently held a Thought Leader Forum on the topic of Opportunity Zones and the benefits they can provide to investors in our region. The Thought Leader panel was composed of Jeff Feinstein, Partner, Pinnacle Partners; Rod Fujita, CPA and principal, tax practice director of real estate services for Bader Martin, PS; Joe McCarthy, Partner, Stoel Rives; and Eugenie Rivers, counsel, Cairncross & Hempelmann. Emily Parkhurst, Market President and Publisher for the Puget Sound Business Journal, led the discussion.
Parkhurst: Let’s start out by outlining how this program works, and what people need to know before they jump in. Who wants to start off?
Fujita: The Opportunity Zones (OZ) program was created by the Tax Cuts and Jobs Act of 2017 (TCJA), which was designed to spur economic development and job creation in distressed communities by providing tax benefits to investors. Investors must adhere to various requirements put in place by the statute and proposed regulations, including who is eligible to benefit from the OZ tax incentives, what gains are eligible for deferral, when investments in Qualified Opportunity Funds (QOF) must be made, timeline of the tax benefits, operational requirements of the fund, and exit strategies.