Opportunity Zone Proposed RegulationsOctober 31, 2018 – Client Alert
The 2017 tax bill provides massive tax benefits to any taxpayer that recognizes capital gain (“Gain”) and that invests an amount equal to the Gain to acquire an interest (“Fund Interest”) in an “Opportunity Zone Fund” (a “Fund”) which in turn invests in certain low-income areas designated by each state (“Zones”). The benefits of investing Gain in a Fund are as follows:
- Tax on the Gain is deferred (“Deferred Gain”) until the earlier of (i) when the Fund Interest is sold or (ii) December 31, 2026, even if the taxpayer takes out a loan against the Fund Interest.
- When the Deferred Gain is finally recognized, the amount recognized is the lesser of (i) the amount of the Deferred Gain or (b) the value of the Fund Interest at that time. The character of the Deferred Gain when ultimately recognized is the same as in the year of the original sale.
- Ten percent of the Deferred Gain is excluded entirely if the Fund Interest is held for five years, and 15% of the Deferred Gain is excluded entirely if the Fund Interest is held for seven years.
- There is NO tax at all on a sale of the Fund Interest (other than the Deferred Gain) if the Fund Interest is held for ten years and the entire Fund Interest is sold, and there is no recapture of depreciation or even recognition of debt in excess of basis. This benefit applies even if the relevant area is no longer designated as a Zone for any reason.
There are a number of technical requirements for achieving these benefits, including (a) the timing of the investment in a Fund, (b) the structure of the Fund, and (c) the investments made by the Fund. The linked summary discusses the details of these technical requirements.