Hurry If You Want to Jump on the Opportunity Zone Train

Investors should hurry if they want to take full advantage of the benefits afforded in Opportunity Zones. The biggest incentives of opportunity zones are tax deferral, but there is a deadline. For that reason, investors should act quickly if they want to invest in Opportunity Zones and take advantage of those financial benefits.

“One of the tax benefits of the Opportunity Zone incentive is deferral and partial exclusion from tax of capital gain, provided the taxpayer contributes funds up to the amount of the gain to a qualified opportunity fund within 180 days from the sale or exchange that triggered the gain,” Kristin DeKuiper, a transactional attorney at Holland & Knight, tells GlobeSt.com. “The deferral lasts until the earlier of the date the taxpayer disposes of his or her interest in the qualified opportunity fund or December 31, 2026.”

The initial capital gains benefits are only one element to consider. There are additional tax benefits for taxpayers that hold interest for at least five years. “In addition to the deferral, if the taxpayer holds the interest for at least five years, 10% of the tax is effectively forgiven; after seven years an additional 5% is forgiven,” says DeKuiper. “If the taxpayer still holds the interest on December 31, 2026, he or she must recognize—and pay taxes on—on the deferred gain, reduced by up to 15% if he or she has held the interest for at least seven years prior to December 31, 2026. Because there is an expiration date on the gain deferral, the time value of money dictates making the investment as soon as possible to maximize the deferral period.”

To receive the full benefits, investors need to hold the interest in the fund for seven years prior to December 31, 2026, according to DeKuiper. This puts an urgency on investors looking to uncover the full benefits of the fund to act quickly. “In order to get the full benefit of the partial exclusion of gain, a taxpayer would have to hold the fund interest for at least seven years prior to December 31, 2026, when deferred gain must be recognized,” she explains.

To outline how the benefits work, DeKuiper used an example: “Assume that taxpayer A makes a deferred gain investment in a qualified opportunity fund on June 6, 2019. If taxpayer A continues to hold the investment, he or she will benefit from a 10% gain exclusion on June 6, 2024, and an additional 5% gain exclusion on June 6, 2026. He or she will pay taxes on 85% of the deferred gain if he or she still holds the interest on December 31, 2026. If the same taxpayer made a deferred gain investment on June 6, 2027, he or she would pay taxes on 90% of the gain, because the day of reckoning would occur before the expiration of seven years from the date of investment. Accordingly, an investment made prior to the end of 2019 will result in the maximum deferral period and the maximum exclusion from tax.”

The benefits of the opportunity zone funds are received over an extended period of time, and DeKuiper says the biggest benefit may take a decade to realize. “Perhaps the biggest benefit from the opportunity zone incentive arises after year 10 of the qualified opportunity fund’s holding period,” she says. “If a taxpayer sells its interest in the fund after 10 years, the appreciation on the investment over the amount of the deferred gain investment is fully excluded from tax. Recently published proposed regulations provide that this benefit applies to sales until 2047, even if the designation of the opportunity zone in which the project is located has expired.”