Alternative Access - November 2019

TAX-FREE WINDFALLS A Definitive Look at Opportunity Zones

The opportunity zone (OZ) is a relatively new federal tax incentive introduced by the Tax Cuts and Job Acts of the United States of America. The policy behind the opportunity zone incentive is to encourage investors with capital gains to invest in low- income and undercapitalized communities (economically distressed areas that do not get a lot of capital revenues investments) in an attempt to promote the all-round rapid development of these communities (or tracts, as they are officially called). have heard investors, asset operators, and government firms talk about it, you will benefit from the following breakdown of what opportunity zones are, as well as how you, as an investor, or how your community or zone (if designated), can benefit from it. The legal repercussions and all the structuring aspects of opportunity zones will also be explained. Whether you are coming across opportunity zones for the first time or you

the zones which were formally designated by the U.S. Department of Treasury with no provision to change the communities categorized as opportunity zones. We have found that 8,762 tracts, which make up 12% of the U.S. census tracts, are classified as opportunity zones and some of the factors peculiar to these tracts are: low income, high poverty, and high unemployment rates. The value of real estate, as well as rents, are also considerably lower. The designated zones are inhabited mostly by minority groups with limited education.

have placed in the opportunity funds (QOF). If you place your capital gains in the funds for a minimum of five years, you get a 10% increase on the basis of your primary investment. If you place your gains in the funds for at least seven years, you get a 15% increase on the basis of the primary investment.

Permanent Tax Exclusion on New Gains

Now, this is the cake and the icing right here. When you invest in an opportunity zone for a minimum of 10 years, the new capital gains you realize from whatever investment your money was used for in the opportunity fund will be tax-free. If you hold onto your investment for 10 years, any additional appreciation is tax-free, and that is the home run right there. Especially if you are investing in a business or a property that has huge potential for significant appreciation, in 10 years you will have a field day with the profits. Can all investors claim opportunity zone incentives and what projects can you use opportunity zones to finance? On the community side, opportunity zones are great and provide value for communities and tracts as well as for the people living within them. Although, every investor may invest, but can everyone invest in opportunity zones? Unlikely. One of the functions of opportunity zones is that it mostly benefits a very narrow group of investors who have an appetite for high risk as well as illiquid investments. On the investor’s end, you stand the chance of earning a lot of tax-free profit.

What are the benefits of opportunity zones?

Diving right into it, the opportunity zone incentive has three major benefits for investors, and they are explained below:

Capital Gain Deferral

What tracts or communities are designated as opportunity zones?

If you decide to take advantage of the opportunity zone as an investor, you get the privilege to temporarily defer taxes on capital gains that you have previously realized. This means that the moment you put your active assets along with all the capital gains you have amassed from them into opportunity funds (opportunity funds are the investment mediums through which you can invest in opportunity zones, also called QOF), these capital gains will not be subject to taxation till the end of 2026. This only changes when you decide to sell the assets.

All U.S. State governors, along with the mayor of Washington, D.C., nominated

Partial Cancellation on Some of That Capital Gain

This means you get a basic step- up on some of the capital gains you

Real estate currently is the holy grail of these projects but not all real estate

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