Opportunity Zones – Unique Investment Vehicle and Opportunity to Defer Capital Gains Tax

  • Jan 8, 2019

As part of the Tax Cuts & Jobs Act of 2017, the Act allowed for the creation of “opportunity zones” in certain designated low income census tracts. Kentucky has designated 144 zones in 84 counties, including Bowling Green and the surrounding counties. Individuals who invest in businesses or real estate through Qualified Opportunity Funds are eligible for federal tax benefits in the form of deferral of capital gains tax.

Unlike prior “like-kind exchange” rules, the Opportunity Zone (OZ)rules do not require that gain realized from the sale of real estate be invested back solely into real estate.  Gain recognized from the sale of the real estate can be invested into a qualified opportunity zone business.  Likewise, capital gains realized from the sale of stock, mutual funds or other business assets may be reinvested either into real estate in the OZ or into a qualified opportunity zone business..

The gain recognized from the sale of real estate or business assets which are reinvested into an OZ may be eligible for deferral; a stepped-up basis; or permanent exclusion.  Capital gains reinvested into an OZ are entitled to deferral until either the later of the sale of the OZ investment or until December 31, 2026.  The capital gains is also entitled to a 10% step-up in basis if held in the OZ investment for a minimum five years. If held for seven years, the investment is entitled to an additional 5% step up, allowing for the exclusion of up to 15% of the original gain from taxation.

Capital gains on the OZ investment is entitled to permanent exclusion from taxation if held for at least 10 years. (This applies to the gain on the OZ investment, not the original gain).

In order to qualify for the deferral, the capital gains must be reinvested into a qualified opportunity fund within 180 days.  This fund is not necessarily a mutual fund, but can be in the form of a corporation, a limited liability company or a partnership.

The proposed regulations contain specific requirements for the qualification of a corporation, LLC or partnership as a Qualified Opportunity Fund and also specific requirements as to the qualification of the business assets in order to preserve the qualification of the business or the real estate.  While qualification is self-certified under the regulations, an investor should consult with their attorney and/or accountant before making such an investment to assure compliance.

For more information, feel free to contact Scott Bachert at sbachert@kerricklaw.com.

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