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What is an Opportunity Zone?
In December of 2017, the the Tax Cuts and Jobs Act created a new community development program aimed at encouraging long-term private capital investment in low-income urban and rural communities. The federal Opportunity Zones program provides three scalable tax incentives for investors to re-invest their unrealized capital gains into Opportunity Funds (privately managed investment vehicles for the purpose of investing in qualified opportunity zones) in distressed communities. These zones have been designated by the governors of every U.S. state and territory. A significant portion of the City of Sandpoint, including the downtown, other commercial, industrial, as well as residential areas have been included by Governor “Butch” Otter as a certified opportunity zone (Census tract 16017950300, below).
How do these incentives work?
Although rules are still pending by the Treasury and Internal Revenue Service that will provide more clarity for investors, there are three primary incentives relating to capital gains tax and are designed to encourage long-term investment:
- Temporary Deferral
A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
- Step-Up In Basis (minimum of 5 year investment)
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
- Permanent Exclusion (10 or more year investment)
A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
Assuming an annual investment appreciation of 7% and a long-term capital gains tax rate of 23.8%, the below chart shows how investment within an Opportunity Zone of $100.00 shows how the investment would perform as compared to a standard portfolio investment:
Source: Economic Innovation Group, 2018
For more general information on Opportunity Zones, please see the following resources:
Economic Innovation Group Fact Sheet
Economic Innovation Group Overview:
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