A new section of the Tax Cuts and Jobs Act provides taxpayers an incentive to invest capital gains in low-income communities. In other words, these newly created “Opportunity Zones” provide options for property owners to reduce their overall tax liability while generating economic growth.

All 50 states, the District of Columbia, and U.S. territories are eligible to designate Opportunity Zones. In order to qualify, an area must receive a nomination by the state and be approved by the IRS.

About the Opportunity Zone Program

Under the program, taxpayers can receive temporary deferral or permanent exclusion of capital gains tax by reinvesting in an Opportunity Zone. The longer the investment remains in a Zone, the greater the tax benefit. For instance, a taxpayer retaining an investment in a Zone for:

• Five years will pay 90 percent of the capital gains tax that would be due had no investment been made.
• Seven years will pay 85 percent of the capital gains tax that would be due had no investment been made.
• 10 years or more will permanently exclude any gain on the appreciation of the reinvestment. This is achieved by the investment receiving a step-up in basis equal to the fair market value at the date of sale.

How the Opportunity Zone Might Work for You

As an example, Ian the Investor has $2,000,000 of capital gains from an unrelated sale. He chooses to reinvest the gain in an Opportunity Zone and hold the investment for over 10 years.

In this example, Ian deferred the tax due on the $2,000,000 and the investor’s basis relative to the original capital gains increases by 15% (i.e., Ian would have taxable income of $1,700,000 instead of $2,000,000). For investments held over ten years, Ian avoids capital gains tax on the appreciation of his investment. This is because the basis will receive a step-up equal to the Fair Market Value on the date of sale.

What are the Qualified Opportunity Zone Requirements

The Qualified Opportunity Zone Program requires that taxpayers reinvest capital gains in a Qualified Opportunity Zone. This reinvestment should finalize within 180 days of the sale or exchange the results in a capital gain. Both business interest and business property are other reinvestment options for Opportunity Zones.

It remains unclear how many states will participate in the program. It is also uncertain how the nomination process for zone designation will work. You can find a current list of Opportunity Zones here or check out Oregon Opportunity Zones here.

At Delap, we are committed to bringing you the highest level of service. It’s our mission to understand and share policy developments that affect our clients. If you have any questions on how you can take advantage of the Qualified Opportunity Zone Program, please contact our team today at (503) 697-4118.

Delap is one of Oregon’s largest local tax, assurance, wealth advisory, and cybersecurity consulting firms. Our offices are located in Lake Oswego & Portland, Oregon.