The 2017 Tax Cuts and Jobs Act created the Opportunity Zone program which offers tax benefits by deferring capital gains from the sale of a business or personal property and investing these gains in qualified opportunity funds (QOFs). Opportunity Zones are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” Investors can be individuals, C corporations, partnerships, S corporations, LLCs, real estate investment trusts, estates and others. According to the IRS, investors generally have 180 days to invest an eligible gain in a QOF. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain. However due to the coronavirus, the IRS is extending the date for the investments of the gains to December 31, 2020, for any investments that would have been due on or after April 1, 2020, and before December 30, 2020.
Only the portion of the capital gains that is invested in a QOF qualifies for the tax deferral. Form 8949 must be filed with your federal tax return for the year the gain occurs. The gains are deferred to December 31, 2026, or until the sale of the QOF. There is also no limit to the amount of gains that can be deferred. The tax basis begins at zero tax basis, and if held for five years, the basis increases to 10%. For seven years, the tax basis increases by 5% of the gain that was originally deferred, and if held for 10 years or more additional tax benefits are realized. Please contact our offices if you want more information on investing your capital gains into QOFs.