Are you willing to hold onto an investment for 10 years – for the sake of paying zero capital-gains taxes?
There's a new opportunity for you.
The Tax Cuts and Jobs Act of 2017 called for the designation of Opportunity Zones and the creation of Qualified Opportunity Funds in yet another attempt to spur private, long-term investment in low-income areas.
Almost anyone — a corporation, partnership, or individual – can roll over any capital gains into one of the funds, which must invest in one of the designated Opportunity Zones.
Holding for at least 10 years would eliminate capital-gains taxes on the new investment.
There are plenty of zones locally, including Mantua, University City, Grays Ferry, North and Northeast Philly, Trenton, and Chester, plus Claymont, Del. For a map of zones, visit this site: https://eig.org/opportunityzones. Or contact the Economic Innovation Group at firstname.lastname@example.org.
My colleague Joseph N. DiStefano reported that some of the Opportunity Zones are in neighborhoods that are already hot spots for investment.
Here's a real-life example:
Mr. and Mrs. Taxpayer sell stock for a $100,000 gain and roll over that money into a Qualified Opportunity Fund on Dec. 1, 2018. If they hold the investment for five years, then $10,000 of the original gain won't be taxed. If they hold it for seven years, $15,000 of the original gain is not taxed.
If they keep the investment for more than 10 years, they pay no capital-gains tax on the income from the business or real estate development they funded, according to tax and accounting firm EisnerAmper.
We attended a packed Duane Morris law firm presentation on Thursday regarding these zones. Other firms such as Ballard Spahr also have great slides. A copy of Ballard's presentation is available at: https://www.ballardspahr.com/opportunityzones.
And O-Zones aren't just for Wall Street types. Anyone with a capital gain is eligible. O-Zone investments could also serve as a supplement to a retirement account or as an estate planning option.
"A lot of folks want to put funds together to invest. You raise money through an LLC or partnership," said Wendi Kotzen, partner at Ballard Spahr.
"You can set it up for yourself, as long as it has to have at least two real investors. There's no reason this has to be restricted to hedge funds or private equity," she said.
Crowdfunding sites such as Fundrise.com are seeing interest from small investors in O-Zone funds. So have firms such as Virtua Partners, a private equity firm, and Sikari Luxe (We endorse none of these, just offering leads for interested investors). Talk to your accountant or tax adviser about setting one up for yourself.
The details are maddening, no doubt about it.
To claim tax benefits, investors must put capital gains into the qualified funds, which, the Wall Street Journal reported, must keep at least 90 percent of their investments in stock, partnership interests, or business property in the designated Opportunity Zones.
Virtua Partners, a global private-equity real-estate investment firm, bills itself as the company behind the first-ever Qualified Opportunity Fund. Opportunity funds are a powerful investment tool in "the emerging markets of America," Zachary Chavez, Virtua vice president, told the audience at Duane Morris.
And by the way, no "sin businesses" allowed. Eligible improvements do not include liquor stores, golf courses, country clubs, massage parlors, tanning salons, hot tub facilities, racetracks, or other facilities used for gambling.
Qualified Opportunity Funds must invest in property or a business that's new. They can't just acquire something in a zone. For instance, if an Opportunity Zone Fund acquires existing real property in an opportunity zone for $1 million, the fund has 30 months to invest an additional $1 million in improvements to that property to qualify for thes program, Abbott Downing said in a note to clients.
For more information, visit the IRS.gov website: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions.