What is an Opportunity Zone?
Image taken from the Economic Innovation Group (https://eig.org/), August 8, 2018
Opportunity Zones were created with the intention to draw investments from private capital to areas in need of redevelopment. These zones, designated as “Opportunity Zones”, provide extremely appealing tax incentives to investors seeking to defer taxes, reduce them, or even permanently exclude capital gains from being taxed. So how does this work?
The State of New Jersey Department of Community Affairs outlines the various caveats and stipulations of the Opportunity Zones program. Of these conditions, here are the most important takeaways:
- To realize the tax benefits gained from investing in Opportunity Zone designated tracts, the investments must come from a qualified Opportunity Fund.
- To qualify as an Opportunity Fund (as of 8/8/18), you must self-register with the IRS when filing taxes. The Opportunity Fund must be formed with the capital gains of another asset. In other words, you need to sell something and reinvest some or all of your capital gains on that sale into the Opportunity Fund (within 180 days). This makes the Opportunity Fund creation process relatively simple.
- 90% of an Opportunity Fund’s assets must be held in Qualified Opportunity Zone stock, partnership interests, or business property.
- Your taxes on the Opportunity Fund and any capital gains or appreciation will be deferred until December 31, 2026. If you sell prior to that date, you lose the opportunity to defer your taxes.
- If you hold the investment for a certain number of years (5, 7, and 10 years), your tax benefits will be varied. The longer you hold the investment, the better incentives you receive.
- Holding an investment for 10 years will qualify you to exclude all taxes on any capital gains.
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