The Opportunity Zone Program, created by the Tax Cut and Jobs Act of 2017, provides federal tax incentives for private entities to reinvest capital gains into privately-created Opportunity Funds. These funds are then used to invest in low-income communities throughout the country. The fundamental goal of the Opportunity Zone Program is to stimulate private investment in disadvantaged areas.
Opportunity Funds
Opportunity Funds are a new class of investment vehicles that specialize in aggregating private investment and deploying that capital in Opportunity Zones to support Opportunity Zone Property.
- In order for an investment to receive preferential federal tax treatment, it must be directed through an Opportunity Fund, which is an investment corporationor partnership designed to invest in Opportunity Zones.
- There are no statutory restrictions on who can set up an Opportunity Fund, or on their internal structure. The creation and monitoring of Funds will be supervised by Treasury and the IRS.
- Funds may invest in businesses, partnerships, or business property, subject to IRS restrictions.
- A minimum of 90 percent of Opportunity Fund assets must be invested in Opportunity Zones.
- Opportunity Funds are envisioned as a market solution for investors who lack the information and wherewithal to execute investments in rural and low-income urban communities.
- The statute does not limit the number of funds that can be created, nor does it provide instruction on the nature of investments (i.e., risk/return profile).
- Pooling capital through a fund structure provides an opportunity for a broad array of investors throughout the country to engage in the program.
Opportunity Zone Property
Opportunity Funds invest in Opportunity Zone Property, which are defined as:
- Qualified opportunity zone stock– any stock in a domestic corporation
- Qualified opportunity zone partnership interest– any capital or profits interest in a domestic partnership
- Qualified opportunity zone business property– tangible property used in a trade or business of the qualified opportunity fund that substantially improves the property
Benefits for Investors
The Opportunity Zones Program provides an incentive for investors to reinvest unrealized capital gains into Opportunity Funds in exchange for a temporary tax deferral and other benefits tied to long-term holdings. With trillions of dollars in unrealized capital gains sitting on the sidelines in stocks and mutual funds, U.S. investors can now roll passive holdings of capital into investments in distressed communities.
Investors can roll existing capital gains into Opportunity Funds with no up-front tax bill. No upfront subsidy is provided to investors; all incentives are linked to the duration of the qualified investment. Investors who choose to invest in these funds defer and reduce their federal tax obligation:
- Any capital gains taxes owed on investments into an Opportunity Fund are deferredfor up to 8 years, depending on the duration of the investment.
- If the investment stays in the Opportunity Fund for 5 years, federal capital gains taxes owed on the original investment are reduced by 10%. If it stays in for 7 years, federal capital gains taxes are reduced by an additional 5%.
- If the investment stays in the Opportunity Fund for 10 years, any profits from the fund’s investments do not incur capital gains taxes. If the original investment stays in the fund for less than 10 years, capital gains taxes are due on profits from the fund’s activity.
Investment Length / Benefits Received:
- Fewer than 5 years – Deferred payment of existing capital gains until the date that the Opportunity Fund investment is sold or exchanged
- 5-7 years – Benefits above + 10% of tax on existing capital gain is canceled
- 7-10 years – Deferred payment of existing capital gains until December 31, 2026 or the date that the Opportunity Fund investment is sold or exchanged (whichever comes first) + 15% of on existing capital gain is canceled
- Greater than 10 years – Benefits of 7-10 year investment + investors pay no capital gains tax on the Opportunity Fund investment (investment are exempt from any capital gains beyond those which were previously deferred)
