Tucked away in the 2017 Tax Cuts and Jobs Act (TCJA) is a provision that has received very little media attention until recently.
In October 2018, Treasury Secretary Mnuchin released additional information about the Investing in Opportunity Act. In short, the Act creates an opportunity for investors to defer or avoid capital gains taxes if they commit to making investments in areas of the country that have experienced persistent economic struggles.
The Economic Innovation Group, a think tank that helped draft and push through the legislation, provides the following summary of the benefits to investors:
The Opportunity Zones program offers investors the following incentives for putting their capital to work in low-income communities:
- A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
- A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation.
- A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. (Note: this exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains).
What do we think?
It sounds promising, there’s no doubt. However, we would offer a word of caution to Main Street investors: It’s still early in the development of the program and there are some details that must be known prior to moving forward. For now, we encourage those who are interested to start doing their homework. Here are a few resources to get you started:
Questions about how this could fit into your long-term financial planning picture? Give us a call at (720) 314-8009 or email us at [email protected].
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.