Qualified Opportunity Zones Offer New Tax Planning Investment Opportunities.

The Federal Tax Cuts and Jobs Act of 2017 enacted a new economic development tool that everyone should know about—the Opportunity Zone program.  The Opportunity Zone program provides an incredible avenue for two things: (1) it offers the opportunity to directly contribute to solving problems such as population decline, lack of jobs, and crumbling infrastructure; and (2) it offers substantial tax benefits to citizens who reinvest unrealized capital gains into Opportunity Funds dedicated to investing in Qualified Opportunity Zones.[1]

The tax benefits associated with investing in the Opportunity Funds are substantial.  If investors hold the Opportunity Fund investments for long enough, the investors will receive preferential treatment of capital gains, including temporary deferral, step-up in basis, and avoidance of additional capital gains taxes.[2]

First, investors that sell appreciated assets and reinvest the gains in an Opportunity Fund within 180 days may defer recognition of such gains until the earlier of when the investor sells or exchanges the investment in the Opportunity Fund, or December 31, 2026.[3]

Second, investors may reduce the amount of capital gains owed at the time of the recognition event via a step-up in basis.[4]  The longer the investment is held, the greater the capital gains tax relief.[5]  After five years, the investor receives a step-up in basis of 10% of the deferred capital gains.[6]  And after seven years, the investor receives a step-up in basis of an additional 5% of the deferred capital gains.[7]

Finally, if the investment is held for ten years or more, the investor avoids all additional capital gains taxes on further appreciation of the Opportunity Fund investment through a step-up in basis to the Opportunity Fund investment’s fair market value on the sale date.[8]  However, this exclusion applies only to gains accrued after an investment in an Opportunity Fund.[9]  The investor still must pay tax on the capital gains deferred at the original recognition event (original sale prior to the reinvestment), as reduced by the 15% step-up in basis that the investor would receive after 7 years.[10]

Kansas and Missouri have designated a combined 235 low-income community tracts as Qualified Opportunity Zones, several of which are located in the Wichita and Kansas City areas.[11]  Both states have maps of their designated Qualified Opportunity Zones, links to which are:

http://ksdot.maps.arcgis.com/apps/View/index.html?appid=1a758c26b4394e679a50ac736e244b03 and
https://mogov.maps.arcgis.com/apps/webappviewer/index.html?id=927f15b15e32461f9f97c2bb543f9ca4.  

Anyone with highly appreciated assets should consider whether investing in an Opportunity Fund is right for them.  Investing in an Opportunity Fund and maintaining compliance with the statute’s various requirements and limitations, however, are not simple.  And to maximize the amount of tax savings, you must act quickly to qualify for the seven-year holding benefit (15% step-up in basis) before December 31, 2026.  If you have any questions regarding how to get involved, contact Martin Pringle’s experienced business and tax law attorneys.

[1] https://kansascommerce.gov/1067/Opportunity-Zones
[2] Tax Opportunity Zone Program Aims to Boost Real Estate Development in Low Income Areas, Practical Law Legal Update w-014-4564
[3] I.R.C. § 1400Z-2(b)(1)
[4] Tax Opportunity Zone Program Aims to Boost Real Estate Development in Low Income Areas, Practical Law Legal Update w-014-4564
[5] Tax Opportunity Zone Program Aims to Boost Real Estate Development in Low Income Areas, Practical Law Legal Update w-014-4564
[6] I.R.C. § 1400Z-2(b)(2)(B)
[7] I.R.C. § 1400Z-2(b)(2)(B)
[8] I.R.C. § 1400Z-2(c)
[9] Tax Opportunity Zone Program Aims to Boost Real Estate Development in Low Income Areas, Practical Law Legal Update w-014-4564
[10] Tax Opportunity Zone Program Aims to Boost Real Estate Development in Low Income Areas, Practical Law Legal Update w-014-4564
[11] https://kansascommerce.gov/1067/Opportunity-Zones; https://ded.mo.gov/content/opportunity-zones