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Federal Opportunity Zone Investing for Capital Gains Deferral and Savings by Matt Campbell

September 27, 2018

By: Matthew S. Campbell

As a result of new federal tax legislation, newly designated federal Opportunity Zones now exist throughout the U.S., including in downtown Tulsa, Oklahoma City and other areas throughout Oklahoma. The advantage of Opportunity Zone investing is that a taxpayer who has current year capital gains from any source (including stock or business sales) can defer that capital gain by investing in a Qualified Opportunity Zone Fund that invests in a qualifying investment such as a new shovel-ready project or for a substantial rehabilitation of qualifying property. The tax deferral ends the earlier of either when the replacement investment is sold or no later than December 31, 2026 (regardless of how long the investment is held).

 A Qualified Opportunity Zone Fund is simply a special purpose entity such as a corporation or partnership that is set up for opportunity zone investments, and this tax deferral opportunity gets even better.  If the qualified opportunity zone investment is held for five years, the deferred tax bill is reduced 10%; and if the qualified opportunity zone investment is held another two years, another 5% is trimmed off the deferred tax bill for a 15% total permanent reduction of the eventual tax bill. On top of that haircut, if the qualified opportunity zone investment is held for a total of 10 years, the investor gets a step-up in basis in the investment to fair market value and the qualified opportunity zone investment can be sold tax free.

Any U.S. taxpayer with capital gain is eligible to take advantage of these benefits so long as the funds are deployed into a Qualified Opportunity Zone Fund within 180 days of the capital gains triggering event. The purpose of this program is to allow investors an opportunity to access unrealized capital gains to stimulate investment in communities throughout the U.S.

Opportunity Zones should not be confused with federal Empowerment Zones or other federal or state incentive zones that have their own specific requirements and benefits, and Treasury regulations on Qualified Opportunity Zones are expected to be issued soon.