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planning matters
• WITH VW LAW
invest IN AN opportunity zone Invest in a disadvantaged community and save big on taxes —a new program makes it possible to do both.
investments in business property. “Opportunity Funds” can be set up for the purpose of making such investments.
When assets such as real estate or stock go up in value, taxpayers may be reluctant to enter into a transaction that will result in a capital gain, and, as a result, face the prospect of a hefty tax bill. When such gains are realized, taxpayers often seek a means to defer or reduce the tax consequences.
To facilitate investment in such zones, the new program provides an impressive package of tax advantages to taxpayers facing the prospect of a significant capital gain. The four major advantages are:
As a result of changes made in the Tax Cuts and Jobs Act of 2017, there is a new method to both defer and sometimes even eliminate capital gain taxes.
Flexibility: Historically, the most common means to defer capital gains taxation is known as the “like-kind exchange” under Section 1031 of the tax code. Such an exchange offers little flexibility since all of the proceeds of a sale must be “rolled over” into a “likekind” asset; in other words, when real estate is sold, real estate must be purchased. The Opportunity Zone program eliminates the “like-kind” restriction and permits the portion of sale proceeds not constituting gain to be retained and used however the taxpayer sees fit. Some of the non-gain proceeds could be set aside to pay the tax when the deferral expires, thus allowing a greater investment in the Opportunity Fund.
In addition, the program is intended as a “win-win”: a means to bring about business investment in economically disadvantaged areas. In conjunction with states and local communities, the federal government has designated over 8,000 “opportunity zones” that meet certain criteria as economically distressed areas that could benefit from targeted
james pieper
Deferral: The capital gains tax on the original gain (the disposition of the appreciated asset by the taxpayer) will be immediately deferred upon investment in an Opportunity Fund. Such deferral will last until at least December 31, 2026. This deferral is comparable to the Section 1031 deferral, except with the additional flexibility. Reduction: In addition to the deferral, when the taxpayer’s investment in the Opportunity Fund is held for at least five years, the tax on the original gain will be reduced up to 15 percent compared to a comparable investment. Elimination: Finally, and potentially most significantly, a taxpayer can eliminate the entire capital gain tax on appreciated property within the Opportunity Fund if the investment is held for a minimum of 10 years. If you hit the jackpot and invest in the next Google through an Opportunity Fund, you may not pay any tax on the gain from that investment. The flexibility of the program allows it to be used by massive hedge funds or just an individual who wants to invest in real estate or a business located in one of the zones. Do not fear the term “fund,” because almost any form of business can file with the Internal Revenue Service to be treated as a “fund”—even an entity with a single owner owning a single property. Vandenack Weaver LLC attorneys can help you navigate Opportunity Zone investment options and ensure your structure meets IRS requirements for the maximum tax advantages. Do not snooze, however: investments must be completed by December 31, 2019, in order to gain the largest possible tax break.
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mmagazine • FeBRUaRY 2019