Buried in the 2017 Tax Cuts and Jobs Act is the creation of “Opportunity Zones.” Opportunity Zones were designed to spur investment in economically disadvantaged areas in each of the 50 states. Investing the gain proceeds from a capital transaction into an an Opportunity Zone provides two extraordinary tax benefits: (1) deferral of the original gain until sale or December 31, 2026 (whichever is earlier) and if the investment is maintained for at least five or seven years, then 10% or 15%, respectively, of the original basis becomes “stepped-up;” and (2) if the investment is maintained for at least 10 years, any gains in excess of the pre-contribution gains inside the Opportunity Zone investment are never recognized. Think of it as a capital gain deferral and a partial basis step-up, combined with Roth IRA-style growth and distribution potential. Investments can be made directly into Opportunity Zones, or they can be made via a contribution to “Qualified Opportunity Fund” – many of which are currently being formed all over the country.
Though treasury regulations regarding Opportunity Zones are still being drafted, it appears that Opportunity Zones will become a powerful tool to achieve tax efficiency on the sale of capital assets while simultaneously spurring long-term economic investment in distressed areas.