Are you in the market to open a business in a low-income neighborhood? If so, now is the right time to do it. A tax law enacted in 2017 includes tax breaks for Opportunity Zones, which, according to the IRS, is an economically distressed community where new investments might be eligible for preferential tax treatment.
To qualify as an Opportunity Zone, a state must nominate a particular area for such designation, and then be certified by the Secretary of the U.S. Treasury. The first set of Opportunity Zones, covering parts of 18 states, were designated in April of this year, but the government has not yet released detailed regulations on the zones.
To invest in an Opportunity Zone, investors put realized capital gains into Opportunity Funds that act as investment vehicles, driving cash flow into low-income communities. The funds can connect investors to investment opportunities in the zones and can possibly eliminate the tax liability on the funds.
Opportunity Zones give investors increasing discounts on capital gains the longer the asset is held in the designated zones. Investors who hold a property for at least five years in an Opportunity Zone receive a 10 percent break; those who hold it for seven years receive 15 percent.
As a separate benefit, an investor can forgo paying capital gains taxes on the appreciation of an investment in Opportunity Zones if the asset is held for at least 10 years.
Because the capital gains deferment ends on Dec. 31, 2026, the window is closing for investors who want to take full advantage of the 15 percent concession. As an investor, you have until Dec. 31, 2019, if you want to benefit from the entire seven-year tax break.
More than nine months after it began, the program still has many unanswered questions. The rules in the initial legislation allow almost any property to qualify as long as it is in an Opportunity Zone. But, would a developer qualify for the program if he were to refinance a property in an Opportunity Zone? Or would leasing a business meet the parameters of an opportunity fund? Also, would projects that have already broken ground count?
The Treasury Department and the IRS are expected to provide more details in the coming weeks.