IRS Guidance on Tax Incentives for Investments in “Opportunity Zones”

On April 25, 2018, the IRS issued a news release with answers to “Opportunity Zones Frequently Asked Questions.” Among the answers was long awaited guidance addressing the process for certification of Opportunity Funds, which are investment vehicles created to invest in Opportunity Zones. The guidance stated that taxpayers will self-certify by completing a form that will be released in the summer of 2018.

Background

The Tax Cuts and Jobs Act (TCJA) created Opportunity Zones to spur investment in distressed communities throughout the country by granting investors preferential tax treatment. Such investments must be made through Opportunity Funds, which are specially created investment vehicles that are required to have at least 90% of fund assets invested in Opportunity Zones.

The preferential tax treatment offered under the Opportunity Zone program is threefold: (1) Investors can defer tax on capital gains invested into Opportunity Zones until no later than December 31, 2026; (2) Investors that hold the Opportunity Fund investment for five or seven years can receive a 10% or 15% reduction on their deferred capital gains tax bill; and (3) Investors that hold the Opportunity Fund investment for at least 10 years can receive the added benefit of paying no tax on any realized appreciation in the Opportunity Fund investment.

Earlier in April 2018, the IRS designated Opportunity Zones in: Alabama, American Samoa, Arizona, California, Colorado, Delaware, Georgia, Idaho, Kentucky, Michigan, Mississippi, Missouri, Nebraska, New Jersey, Northern Marianas Islands, Ohio, Oklahoma, Puerto Rico, South Carolina, South Dakota, Texas, Vermont, Virgin Islands, and Wisconsin.

Qualified Opportunity Fund certification

To become a Qualified Opportunity Fund, an eligible taxpayer must self-certify by attaching a form to their timely filed federal income tax return for the tax year. The form will be released in the summer of 2018. No approval or action by the IRS is required.

Implications

This clarification around the Opportunity Fund certification process is a key step in the advancement of the program. While some states have yet to receive their Opportunity Zone designations (expected in the coming weeks) and we expect that the IRS will issue additional guidance to further clarify the statute, the clarification around the Opportunity Fund certification process will allow some taxpayers to imminently execute on complete Opportunity Zone transactions (setting up an Opportunity Fund, seeding it with a realized capital gain, and deploying the Opportunity Fund’s capital in to Qualified Opportunity Zone Property).

For more information about this tax incentive program, please contact a Caroprese & Company tax advisor.

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