Keep More of Your Capital Gains
Opportunity Zones are Coming
If you want to keep more of your capital gains or you’re seeking investment capital for a development, you’ll want to keep reading. Opportunity Zones are coming!
According to the Wisconsin Housing and Economic Development Authority (WHEDA), Opportunity Zones are the largest federal economic development program in the last 15 years. Lac du Flambeau is an Opportunity Zone, with 120 others designated across Wisconsin.
Personally, I’m excited by the potential for local investors to invest in what they know. I believe the benefits of investing in a local Opportunity Zone go beyond tax savings. Area investors now can fuel the regional economy, creating jobs, revenue and a brighter future for the Northwoods.
The federal 2017 Tax Cuts and Jobs Act established Opportunity Zones. The program is designed to drive long-term capital to rural and low-income urban communities throughout the nation. Tax incentives are used to encourage private investment in impact funds. And, no, you need not live in an Opportunity Zone to invest in one.
To reap the maximum benefit of investing in an Opportunity Zone, you will want to do your homework. The federal government is continuing to evolve the guidance on how the incentives will work.
Over the course of 2019, presumably, the law will be finalized. This will clear the way for investors to improve capital gains tax liability. To do so, however, as of now, Opportunity Funds will need to be set up by December 31, 2019. Seems like plenty of time. But there a couple things you need to set up.
All Opportunity Zones, however, are not created equal. Within tribal reservation lands, investors stand to gain even more by accessing tribal-only vehicles that can reduce investment risk.
Furthermore, working with the likes of WHEDA, there may be more investment vehicles for rural communities to encourage investors. New market tax credits and affordable housing incentives appear viable, according to discussions with WHEDA officials.
Investors certainly stand to benefit. But developers with qualified projects also stand to gain. Opportunity Zones create incentives to make a developer concept even more attractive to investors.
How do investors benefit?
According to the U.S. Treasury, Opportunity Zones are designed to spur economic development by providing tax benefits to investors.
First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.
If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%.
Second, if the investor holds the investment in the Opportunity Fund for at least 10 years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged. In other words, after settling their original tax bill, patient investors in Opportunity Funds will face no capital gains taxes on their Opportunity Zone investments
Who can set up a Qualified Opportunity Fund?
To become a Qualified Opportunity Fund, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return. A Qualified Opportunity Fund is an investment vehicle set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
Who invests in Opportunity Zones?
U.S. investors are eligible to receive a temporary tax deferral and other tax benefits when they rollover unrealized capital gains into Opportunity Funds for a minimum of 5 years.
What investments qualify?
According to EnterpriseCommunity.org, Opportunity Funds are authorized to invest in Opportunity Zone Property: Stock in a domestic corporation, capital or profits interest in a domestic partnership, and tangible property used in a trade or business of the Opportunity Fund that substantially improves the property.
Where can I learn more about Opportunity Zones?
Information above derived from a few sources. For a roster of Opportunity Zones to consider investing in Wisconsin, visit WHEDA.com/Opportunity-Zones. For frequently asked questions on Opportunity Zones, visit IRS.gov and search for Opportunity Zone. Finally, talk to your financial advisor or accountant. Also, listen to a recent radio spot of ours discussing opportunity zones on WXPR. We will also be hosting a seminar on Thursday February 21, 2019. We will discuss Opportunity Zones and the potential investment benefits here.