Opportunity Zones The Basics, Recent Developments & Expectations.

• Author: Koehler, David R.
• Position: Persona financial planning

Opportunity zones were made into law with the lax Cans and Jobs Act (TCJA) of 201 7 and arc designed as an economic development tool to encourage long-term investment and job creation in low-income communities throughout the country. The biggest headline-grabbing feature is the ability for taxpayers to defer gain recognition until 2026 and potentially eliminate up to 15 percent of initial gain.

This article is targeted to give CPAs the tax basics surrounding opportunity zones, updates on recent developments and explore where taxpayers and their financial advisers may sec "opportunities" in this area.

The Basics

The initial incentive to invest in a Qualified Opportunity Fund or Qualified Opportunity Business is certainly the initial tax deferral on a realized capital gain. This incentive is compounded by the 10 percent to 15 percent gain elimination on the original investment, given the proper holding periods. Another attractive feature is the availability of complete gain exclusion on the appreciation of the new opportunity /one investment after a 10-year holding period. Yes, the entire gain on the new investment is federally tax-free if held for 10 years.

IRS Code See. 1400Z, amended by the TCJA, allows a taxpayer to elect to defer a realized capital gain in the current year and defer all federal tax on the invested gain until Dec. 31, 2026. IRS Form 8949 is used to make this election. A taxpayer has 180 days from the realization of a gain to make a qualified investment in an opportunity /one and qualify for tax deferral.

The law states that until Dec. 31, 2026, if the investor-holding period of the new investment exceeds five years, 10 percent of the initial gain is exempt from federal tax. After a seven-year hold an additional 5 percent of original gain is tax-free. The payment of the remaining capital gain tax, as well as the 10 percent or 15 percent gain exemptions, give taxpayer basis in the investment.

It's important to emphasize that the remaining original gain deferred at time of investment (85 percent to 100 percent) becomes taxable in 2026. Taxpayers and their advisers need to plan accordingly to pay this additional tax assuming the initial gain funds arc still invested in the opportunity zone fund or business.

Since the signing of the tax law in late 201 7, the IRS has moved steadily toward providing more guidance and clarity on the specifics of the code section. By June 14, 2018, the IRS certified 8.762 low-income community...