By: Caden Thomas
Tucked away in the 2017 Tax Cuts and Jobs Act lies a community development tool to encourage private investment in distressed communities. This program, Qualified Opportunity Zones, has the potential for significant tax benefits for individuals who might be facing capital gains taxes.
Qualified Opportunity Zones aim to fuel revitalization in specifically identified low-income census tracts. To help incentivize private investment, taxpayers receive tax relief when investing capital gains in a Qualified Opportunity Fund. Opportunity Funds, in turn, re-invest in new construction and improvements to unused buildings. Opportunity Zones have been established in all 50 states. Tennessee has 176 census tracts that are designated opportunity zones.
So how does the investment program work? If a taxpayer is planning to sell appreciated property, whether that be stocks, real estate, or business property, and expecting a large capital gain, they would potentially be able to defer this gain for several years. These gains must be invested in a qualified fund, within 180 days. This type of investment allows the taxpayer to defer tax on the original, and avoid tax on any appreciation earned through investments in the fund.
Furthermore, the amount of capital gain invested into the fund may be elected for deferral until December 31, 2026, or until the interest is sold. Taxpayers can receive a step-up in basis after holding their investment for a certain length of time.
After five years, the taxpayer will receive a 10% step-up in basis
•After seven years, the taxpayer will receive a 15% step-up in basis.
In order to receive the full 15% increase in tax basis, the investment must be made by December 31, 2019.
To provide a simple example, lets assume an individual was expecting a $100,000 capital gain, and within 180 days, they invested this gain into a Qualified Opportunity Fund. As shown in the chart, the step-up in basis decreases the amount of gain recognized on the initial investment, thus decreasing the amount of capital gains tax. When considering a capital gains rate of 20%, an investment held for seven years can yield a tax savings of $3,000! To make this deal even sweeter, lets also assume that the fund has appreciated in value and the interest is sold for $250,000. None of the $150,000 capital gain related to interest in the fund will be subject to capital gains tax!
If you are expecting significant capital gains in the future, this type of investment may be an advantageous tax solution. We welcome the opportunity to help create a strategic plan that addresses your specific short and long-term investment and tax planning goals.
For more information on the specific Qualified Opportunity Zones in Tennessee,
For more information on Opportunity Zones nationally,