Understanding the Potential Tax Benefits of Opportunity Zones

Keep in mind, this has not been finalized as it is currently going through legislation.

With the S&P 500 continuing to set record highs, opportunity zones represent an excellent way for taxpayers to realize their gains and diversify their portfolio away from the equities market while deferring and mitigating some of their capital gains taxes. It can also be a way to make low-income housing pencil for developers in an environment of rising construction costs.

The Investment in Opportunity Act was included in the 2017 Tax Cuts and Jobs Act. Taxpayers can defer and potentially reduce capital gains by making timely investments in opportunity zone properties. The purpose is to incentivize and foster investment in low-income communities, or LICs, to jobs and accelerate the growth of small business formation.

Opportunity Zones are found in census tracts that are classified as LICs. These same LICs are based upon poverty rate (20%) or median family income (80% of national average). There are 74,000 census tracts in the United States and slightly more than a third are considered LICs. The LIC must then be nominated by the Governor and 168 in Arizona are eligible for nomination.


3 Potential Tax Incentive Benefits


1. Temporary Deferral of Capital Gains Taxes

The amount of deferred gain subject to income tax is based on the lesser of the amount of the deferred gain or the fair market value of investment in the Opportunity Fund less the taxpayer’s basis in the opportunity fund.


2. Partial Reduction of Deferred Gain

The taxpayer has an initial basis in the opportunity fund of zero. 

  • Hold for 5-years: Investor’s tax basis in the opportunity fund is increased by 10% of the amount of the deferred gain.
  • Hold for 7-years: Investor’s tax basis in the opportunity fund is increased by an additional 5% of the amount of the deferred gain.


3. Forgiveness of Additional Gain

If held for 10 years, then there is no taxable gain on the appreciation of the asset.


To see if one of your properties could be in an opportunity zone, check out this interactive map from the Community Development Financial Institutions (CDFI) FundIf you have additional questions about how investing in commercial real estate located in an opportunity zone could help your portfolio, please reach out to Tower Capital today.


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