The TCJA created a new source of equity for qualified operating businesses and real estate developments. Although this new provision didn’t receive a lot of publicity initially, it is starting to pick up some momentum now. Under this provision, governors in each state had until March 22, 2018, to designate 25% of their state’s low-income census tracts as Opportunity Zones. Banks, hedge funds or similar entities can then create Opportunity Funds (OF), and at least 90% of the money invested in those funds will be used to seed new businesses, expand existing businesses or fund real estate development in those certified zones.
So why might investors want to invest in these new OFs? They offer opportunities for the deferral or even full exclusion of investors’ taxable gains:
- Taxpayers can defer gain from the sale of assets if they reinvest the gain in an OF within 180 days of the sale that generated the gain. That deferred gain is then recognized when the OF investment is sold or on December 31, 2026, whichever is earliest.
- If the OF investment is held for a period of time, the taxpayer receives a step-up in their tax basis:
- A five-year hold results in a step-up in basis equal to 10% of the original deferred gain.
- A seven-year hold results in a step-up in basis equal to 15% of the original deferred gain.
- If the OF investment is held for 10 years, 100% of the gain realized on its sale is exempt from tax.
See the April 19th update to this guidance here