WHAT are opportunity zones?
Opportunity Zones are a new type of investment opportunity that enables investors to defer and ultimately reduce capital gains taxes paid. They reward investors for long-term capital investments in designated rural and urban communities.
WHERE are opportunity zones?
In Vancouver, Washington, the yellow, pink, blue, and orange segments are Opportunity Zones:
In greater Portland, the everything blue is an Opportunity Zone:
WHY invest in an opportunity zone?
–Capital Gains Deferral–
If you are subject to capital gains on sales of assets this year, you can defer those gains until December 31, 2026 by reinvesting the gains in an Opportunity Zone. You’ll realize those gains at any time that you sell before that date.
–Capital Gains Reduction–
If you hold the investment at least 5 years, Opportunity Zones enable you not only to defer the capital gains but reduce them. After 5 years you can take a step up in basis on your original deferred gains by an amount of 10% of the originally deferred gain.
This means if you were deferring $1,000,000 of capital gain through your Opportunity Zone investment, after 5 years that becomes $900,000 in deferred gain and $100,000 of gain not subject to capital gains tax.
If you hold the investment at last 7 years, you get another 5% step up in basis on your original deferred gain, so your deferred gain drops to $850,000 and your gain not subject to capital gains increases to $150,000.
FINALLY, if you hold your investment a full 10 years an additional benefit comes into play. To be clear, you WILL pay taxes on your originally deferred capital gains (though they may be reduced 10% or 15% depending on whether you’ve held the investment 5 years or 7 years). You’ll pay them in your 2027 tax return as your gains are realized on December 31, 2016.
But After 10 years, when you sell your stake, all gain beyond your initial investment is free of capital gains taxes. This means all actual GROWTH on your 10 year held investment in an Opportunity Zone can be capital gains tax free when you sell.
WHEN to invest in an Opportunity Zone?
There are Several important time factors in the law:
The first involves your initial investment time window: There is a clock ticking between dates of your sale (the sale that generates taxable gains originally) and re-investment of those dollars in an Opportunity Zone. Schedule a consult with your tax strategist to plan this out (get in quick if you had a capital gains taxable sale recently) so you don’t miss this window. You’ll also need to be sure to file proper forms for de
The second involves the reduction of taxable gains. You must invest in 2019 to get the max benefit of the law, as your gains are realized 7 years from December 31, 2019. You have to hold for longer than 7 years to get the 15% step up in basis.
Investments begun in 2020 can still get the 10% step up in basis as that requires only a 5 year hold.
And finally, no matter what the reduction of gain you receive (10%, 15%, or zero for those who invest starting in 2022), after holding for 10 years, your gains ON the Opportunity Fund investment will be capital gains free.
HOW to invest in an Opportunity Zone?