As part of the Tax Cuts and Jobs Act that was passed in December 2017, a provision was created to help spur investment in distressed communities across the United States.

These provisions related to “Opportunity Zones” allow for two basic tax benefits: deferral of gains that are invested into Opportunity Zone areas; and non-recognition of gain for the period invested in the Opportunity Zone, provided that it meets certain requirements.

When these rules were first released, CPAs were left wondering what the regulations were going to look like because, as in most instances around tax law, the regulations are where we really find out how beneficial something really is. Well, now, the IRS has issued regulations on the incentives around the opportunity zone areas and the proposed regulations state that almost all capital gains qualify for deferral. Pass-through entities (partnerships, S-corporations) and estates and trusts can elect to defer the gains at the entity level or at the partner/shareholder/beneficiary level.

To qualify for the deferral, the capital gain to be deferred must be invested in a Qualified Opportunity Fund (“QOF”). The QOF must hold at least 90 percent of its assets in Qualified Opportunity Zone property, which includes any Qualified Opportunity Zone – stock, partnership interest or business property.

Investors can defer tax on any gains invested in a QOF until the earlier of the date on which the QOF investment is sold or Dec. 31, 2026. If the QOF investment is held for five years, you can exclude 10 percent of the deferred gain. Seven years allows you to exclude 15 percent of the deferred gain. Ten years or longer allows you to step up your basis in the QOF investment to the fair market value on the date it is sold, effectively eliminating all gains on the QOF investment.

You must invest in the QOF within 180 days of the date you sold the assets for which you are deferring gains. Deferred gains are capped at the amount invested in the QOF. Any excess capital gains will be recognized and included in gross income.

You do not have to reside within the Opportunity Zone to be eligible for the deferral. You must only invest a recognized gain in a QOF and make the election to defer tax on the gain. The eligible partnership or corporation serving as the QOF self-certifies a statement attached to its tax return.

In the Wilmington area, there is an Opportunity Zone downtown with rough boundaries covering the zone between Market Street and Greenfield Lake between Third and 17th streets. There is also a section surrounding UNCW. There are large zones in surrounding Brunswick, Columbus, and Pender counties. Click here for a complete list of Opportunity Zones.

The Opportunity Zone tax incentive provides an incredible tax savings opportunity to invest in low-income communities across the country. Contact Earney & Company, L.L.P. to schedule an appointment to discuss a strategy to defer capital gains and reduce your tax liability through this new Opportunity Zone tax incentive.