Opportunity zones were initially introduced with the Tax Cuts and Jobs Act of 2017. The goal was to jump-start economic growth in lower-income areas around the U.S. With opportunity zones, participating investors would defer paying any tax on capital gains after selling a property in the specified area if the gains earned are invested in an opportunity fund. The fund must invest up to 90% of the assets in a property or business in one of the specified low-income communities.
There are several challenges facing those interested in opportunity zones, including finding qualified opportunity zone funds near me. Keep reading for some of the most commonly asked questions about these to know what to expect.
- What Are Opportunity Zones?
An opportunity zone was created based on the TCAJ mentioned above. Opportunity zones are economically distressed communities that are determined by certain government criteria and designated by each state’s governor. An investment in these locations, based on some conditions, could receive preferential tax treatment. The goal of the opportunity zones is to encourage longer-term investments in the low-income communities found around the nation.
- What Benefits Are Offered to Investors in Opportunity Zones?
Investing in opportunity zones let taxpayers defer paying taxes on the gains earned from the exchange or sale of any property. Taxpayers may be able to pay a lower amount of tax on the gain that was deferred, and in some situations, pay no tax for the gain that occurs because of the appreciation of the investment in an opportunity zone. This is all dependent on the overall holding period.
- How Does Someone Invest in Opportunity Zones?
Investments in opportunity zones must be conducted through qualified opportunity funds to receive the tax benefits mentioned. The QOF can be a C corporation or a partnership, which certifies it is actually a QOF. The corporation or partnership will be able to self-certify by filling out and filing Form 8996, a draft which is offered by the IRS.
- How Long Do Taxpayers Have to Invest the Capital Gains from the QOF?
Starting on when the sale occurs that causes some capital gains, the taxpayer has 180 days for reinvesting the amount of the gain that needs to be deferred into the QOF. At this point, the taxpayer is then going to choose to defer or return the gain. For example, if someone sold stock in 2020, then the election would occur with the 2020 tax return.
- How Much of the Gains Can be Deferred?
Taxpayers can make the decision to defer as little or as much of the gain as they want. There’s no limit to the total amount of the gain that is able to be deferred. The taxpayer can also have the option to defer the gains by investing all into a QOF and then make the election on any type of timely filed return.
When it comes to opportunity zones, there are more than a few factors to consider. Take some time to keep the information above in mind to ensure the desired results are achieved. Being informed and knowing what to expect with the opportunity zones will help ensure the right investments are found. Keep this in mind to make the right decision about the investments that are ultimately made.