The new Opportunity Zones tax incentive aims to drive long-term equity capital to distressed communities by providing tax benefits on investments in Opportunity Funds. Speakers will provide details on how the tax incentive is expected to work and highlight emerging national and local strategies to engage residents around how these funds are deployed in their communities.
Thus, Opportunity Zones incentivize capital investment in two critical ways: (1) the deferred and reduced tax owed on capital gain that is rolled into an Opportunity Fund, and (2) the elimination of capital gains tax on the subsequent gain from long-term Opportunity Fund investments.
However, there is an important and often overlooked limitation. The exclusion of capital gain for investments in Opportunity Funds held for 10 years is only available to equity investments that are financed with rolled-over gain. Thus, if a taxpayer invests $100 in an Opportunity Fund, but only $70 represents gain from a prior investment, then only 70% of the taxpayer’s equity investment is eligible for the capital gains exclusion (assuming the investment is held for 10 years). At least currently, the capital gains exclusion does not extend to new capital that cannot be traced to gain from a prior investment.
OZC continues to watch industry developments to assist clients seeking to take part in this ambitious objective of stimulating economic development and job creation coupled with investor tax incentives.