For any investor there comes a time to decide whether to hold on to an investment or cash out when the going’s good. There are benefits and disadvantages in each case. Hold it too long and market disruptions, inflation or other surprises can turn a profitable venture into a loser. By contrast, if you get a big win, the benefits gained can be diminished by the tax paid on any capital gains.
Enter the Federal Qualified Opportunity Zone program. This program was created and added to the U.S. Tax Code through the Tax Cuts and Jobs Act in December of 2017. The Opportunity Zone program is intended to provide a “safe haven” of sorts for capital gains.
The premise of the program is to give successful investors the opportunity to invest their capital gains in some of the economically distressed census tracks. In return, their investment can receive preferential tax treatment. In basic terms, the program provides a vehicle for people with investment gains to move that money into neighborhoods who need the investment.
In the Western half of PA, there have been 86 Opportunity Zones approved by the Governor’s office. Five of those zones have been approved right here in Blair County.
While the official guidelines and regulations have yet to be released by the IRS, there are some basic provisions that are known now. They can be broken down in the following 4 steps:
- Any individual or for-profit business that has realized capital gains can invest that money into an Opportunity Fund in exchange for ownership of the Fund.
- The Opportunity Fund, in turn, invests that money into any Qualified Zone property. This “property” can take the form of real estate located in a Zone, stock in a company who operates in a Zone, or a partnership interest in a Zone business.
- The capital gains tax invested in the Fund can be deferred for up to 10 years. In addition, if the investor holds on to their Fund investment for at least 5 years, they receive a 10% discount on the capital gains tax basis. If they hold on to the investment for at least 7 years, that discount increases to 15%.
- The real benefit of the program becomes apparent if the investor holds on to their Fund investment for 10 years. No capital gains tax is assessed on any appreciation in the value of the Zone property investment at that time.
Bottom line is that if an investor is looking to put their money to work in a disadvantaged neighborhood and that investment grows over time, they may end up paying no capital gains tax on that growth. For the disadvantaged communities, the investment can help stimulate the economy and result in well-paying jobs, which is the ultimate intent of the program. It’s a win-win for both sides of the equation.
ABCD Corporation is currently exploring the creation of an Opportunity Fund and how our local fund might bring our community partners together. We are staying up to speed on the program regulations as information from the IRS is released. If you would like more information on what our local program might look like, how to invest, or more details on how the programs works, please contact me at toms@blairalliance.org or 814-944-6113.
