Opportunity Zones Program
New federal tax break allows eligible taxpayer to defer capital gains tax in exchange for investing in certain distressed communities across the country
In December 2017, the Tax Cuts and Jobs Act passed by U.S. lawmakers included a new tax benefit for certain taxpayers. In short, a new program, Opportunity Zones (OZ), offers a tax break incentivize to taxpayers in an effort to direct private investment capital into economically distressed communities. In exchange for making a qualified investment into a designated OZ fund, taxpayers who face federal tax liability on realized capital gains income can defer paying this tax until as late as 2026. In addition to the tax deferral, these taxpayers can reduce their original capital gains tax liability by as much as 15% based on how long they hold their original OZ investment and pay no capital gains tax on the appreciation on the original investment.
In summary, the OZ Program provides three tax benefits – (1) a deferral for paying capital gains tax, (2) a reduction in the amount of capital gains tax owed, and (3) exclusion of federal capital gain tax on appreciation of OZ investments.
How Opportunity Zones Program Works
The goal of the OZ program is to attract capital into economically distressed communities across the country, with the goal of spurring economic development and expanding access to opportunity. As such the program allows eligible taxpayers to sell an asset and realize a capital gain. Rather than paying federal capital gains tax on this realized income in the year the asset is sold, the taxpayer can instead invest the capital gains into a designated OZ fund within 180 days of realizing the capital gain.
More than 8,700 low-income census tracts have been designated as OZs in 50 states, the District of Columbia and five U.S. territories. Eligible taxpayers can make qualified investments in any of these OZs in order to participate in the deferral of capital gains tax until as late as 2026 and other tax benefits.
If the investor holds the original qualified OZ investment for five years, their original capital gains tax liability is reduced by 10%. If the original OZ investment is held for an additional two years (seven years in total), the original capital gains tax is reduced by an additional five percent – for a total 15% capital gains tax liability reduction. After 10 years of holding the original OZ investment, 100 percent of appreciation on the OZ investment is excluded from federal capital gains tax.
While new and much is to be learned as the various stakeholders move forward, this program could indeed become a viable value-add tool in the economic development toolbox for local communities across the country. Our goal as a firm engaging on this front is to help promote inclusive economic development and opportunity within these designated communities. Feel free to reach out to us to learn about how BWC Consulting can be a value-add resource in your efforts to take advantage of this program.
BWC Capital’s OpportuNC Fund
BWC Capital seeks partner-investors in its initial OpportnNC Fund, which will focus on deploying transformative investment capital into vetted and deal-ready OZ projects. By investing realized capital gains into our OpportuNC Fund, partner-investors will be able to participate in attractive tax breaks:
- Defer payment of capital gains tax liability until as late as 2026 for realized capital gains income that is reinvested into OpportuNC Fund.
- Reduce original capital gain tax liability by 10% if investment into OpportuNC Fund is maintained for five years.
- Reduce original capital gain tax liability by 15% if investment into OpportuNC Fund is maintained for seven years.
- After original investment into OpportuNC Fund is maintained for 10 years, all appreciation on OZ investment will not be subject to federal capital gains tax.
Furthermore, our OpportuNC Fund seeks market-rate returns with our OZ investments while also driving positive impacts in the communities in which we deploy capital. To learn more about our OpportuNC Fund and how to become a partner-investor please contact us.