IMPACT INVESTING

The Tax Cuts and Jobs Act of 2017 offers a radical tax break to investors.

3 Key Benefits

  1. Taxpayers may defer paying tax on capital gains, if such capital gains are invested in a QOF, within 180 days from the gain. The deferral period ends the earlier of when the tax-payer sells its interest in the QOF or December 20, 2026.
  2. Investments held for 5 years prior to December 31, 2026 will also qualify for a 10% increase in the tax-payer’s tax basis of the amount of the deferred gain.
  3. Any taxpayer that holds its investment for a minimum of 10 years, can achieve no capital gain tax on the appreciation of its investment.

Defer Capital Gains Tax

Investors in the stock market have done particularly well since the recession. The S&P 500 nearly tripled between 2009 and 2016. The Dow Jones Industrial Average rose more than 140 percent between 2009 and 2017. Investors are sitting on significant unrealized capital gains that could go a long way toward jump-starting communities. Enough incentive to attract the first investor or developer into a distressed area, which becomes a tipping point for additional investment. Under the program, an investor can defer capital gains tax on realized gains if the gains are invested in a Qualified Opportunity Fund within 180 days of the sale.

Twelve percent of US census tracts are Opportunity Zones (8,762 tracts). Governors of the 50 states and 4 territories and the mayor of Washington, DC, nominated the zones, which were officially designated by the US Department of the Treasury. The designated zones have lower incomes, higher poverty rates, and higher unemployment rates than eligible non-designated tracts.

Adjusted Reduced Tax Basis

Initially, the tax basis is deemed to be zero. However, if the Opportunity Fund investment is held for at least 5 years, the basis is increased to 10 percent of the deferred gain if invested by 12/31/2020. Finally, if the Opportunity Fund investment is held past December 31, 2026, the investor will be deemed to realize the deferred capital gains as of December 31, 2026. In addition, will pay capital gains tax on the amount of recognized gains as of that date (determined as described above, with basis adjustments if applicable).

The basis is then adjusted to equal the amount of the original Opportunity Fund investment. Finally, if the investor holds the Opportunity Fund investment for at least 10 years, the basis is deemed to be the fair market value of the Opportunity Fund investment and no capital gains tax will apply to the appreciation on the Opportunity Fund investment.

FAQ

Frequently Asked Questions

Individuals who are realizing a capital gain across all asset classes can invest those monies on a tax deferred basis, as long their gain is invested in a qualified opportunity fund within 180 days of the sale or exchange.  The process is very easy. Agree to subscription agreement, transfer funds, receive stock certificate and tax statement.  The whole process is usually completed within 48 to 72 hours.

In certain situations where an individual is facing the expiration of the 180 day window we can expedite the process to same day.

The capital gains must be invested in qualified opportunity funds that have 90% of their assets invested in qualified opportunity zones. Non capital gain money can be invested into opportunity funds however there would not step up in tax basis benefits for earnings of non capital gain money.

All capital gains on the sale or or exchange of any property to an unrelated party invested within 180 days are eligible for the tax benefits.

The minimum investment is $100,000.

Yes. Opportunity Funds are designed to be easier with less hassle than 1031 Exchanges.

A partnership interest is an eligible investment. The Puerto Rico Opportunity Zone Fund (PROZ) is a limited partnership. Meaning you are only investing in the assets held by the fund.

Investors can invest in opportunity funds by selling an asset and triggering a capital gain, then subsequently placing that gain in a qualified opportunity fund with 180 days of the original sale. There is a subscription agreement that is signed by the investor and a wire transfer agreement. This is then followed by an execution of the agreement with a wire transfer into opportunity fund account.

Investors have 180 days to invest realized capital gains.

No. You can take receipt of the gains, as long as you reinvest within 180 days. As an Opportunity Fund we have to certify with the IRS. You receive a tax statement at the end of the year.

In part. The original taxes are deferred until December 31, 2026 (or the date of a sale, whichever is earlier). Investors will have to recognize a portion of the deferred gains that year. Investors may benefit from the step up in basis at years 5 (10%) and 7 (another 5%) if they reach either holding period before December 31, 2026.

Opportunity zones are currently being designated by the governors of each state. Each state may designate 25% of the eligible census tracts in their state. As of right now, all 50 states and Puerto Rico have submitted and have been approved for designated Opportunity Zones.

No. Opportunity zones must meet certain criteria to qualify. Census tracts with over 20% poverty and median family income no greater than 80% of the area medium will qualify. There are also contiguous zones, which are census tracts that are adjacent to a designated opportunity zone, and also do not exceed 125% of the median family income of that same opportunity zone.

New monies can be invested in an opportunity fund, however the investor would not enjoy the same tax benefits as realized capital gains.

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