Capital Gain Deferral for Investors and Real Estate Developers in Qualified Opportunity Zones
By Peter Downing, National Principal-in-Charge Tax Credits and Incentives
A little-known section of the 2017 Tax Cut and Jobs Act created “Opportunity Zones” to redirect commercial investments in America’s distraught areas where there is high poverty and sluggish job growth.
One in six Americans live in these distressed areas, where the median household income remains far below the $59,000 national level. The new law instructs governors in each state, along with the mayor of the District of Columbia, to designate Opportunity Zones from a pool of low income, high poverty census tracts, subject to certification by the Treasury Secretary.
Investors such as banks, hedge funds, or private equity funds then create “Opportunity Funds” to direct their investments into Opportunity Zone businesses and commercial real estate projects.
Per a recent New York Time article, The Economic Innovation Group has estimated that there is more than $2 trillion in unrealized capital gains sitting on investors’ and developers’ balance sheets, these gains would ordinarily be taxed at the capital gain rate of 20%, plus a 3.8% surtax. Investors and real estate developers that have realized or are planning on realizing capital gains in 2018 and beyond can now defer those capital gains for up to 9 years by investing in Qualified Opportunity Zone Funds. The longer an investor holds an Opportunity Zone investment, the better. If held for ten years, 100% of the capital gains tax can be avoided.
The following states have approved Opportunity Zones that are ready for investment: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Puerto Rico, Rhode Island, South Carolina, Tennessee, Texas, Vermont, US Virgin Islands, Virginia, Washington, West Virginia, Wisconsin and Wyoming.