When the 2017 Tax Cuts and Job Acts was introduced, there was a new investment opportunity released.
It allowed some investors to receive special tax incentives when they invested in some type of distressed area. This program requires investing in what is referred to as Opportunity Zones.
Learning more about the opportunity fund investment and its potential will help an investor figure out if this is something they want to invest in. The entire purpose and goal of the program are to help increase development and the creation of jobs in areas that are economically distressed.
How to Invest in Opportunity Zones?
To help revitalize the economy, tax incentives for the capital gains that were invested in a QOF were introduced. Sometimes, a person will be able to defer and reduce the capital gains tax if they have invested in capital gains in the Qualified Opportunity Fund. Besides that, the gains that are earned from the QOF may be entirely tax-free.
A Qualified Opportunity Fund will invest in the Opportunity Zones. Every state will nominate the areas that will be classified as an Opportunity Zone. It is the Secretary of the U.S. Treasury that will certify this nomination through the IRS. There are more than 8,700 different Opportunity Zones across the U.S. states and all territories.
Currently, the benefit for Opportunity Zone investment is valid from 2017 until 2026. It will expire unless Congress makes the decision to renew this program.
The Qualified Opportunity Fund Defined
Before making any type of investment, it is essential to learn more about what the Qualified Opportunity Fund is. It is more specifically a partnership or a type of C corporation where an investment in a Qualified Opportunity Zone is made. The business, which could be existing or new, must certify it is the Qualified Opportunity Fund, which is done by filing the IRS Form 8996.
Benefits of Opportunity Zone Investments
One of the biggest benefits offered by an Opportunity Zone investment is that the capital gains will be deferred on the original sale until the QOF has been sold or by the completion date, whichever happens to occur first.
The sale needs to have been made to some type of “unrelated” party. With this program, shareholders need to have owned a minimum of 20% of a corporation that is a related party.
Additionally, taxable capital gains will be reduced by up to 10% if there is a QOF that is held for five years and it may be reduced by up to 15% if it is held for a minimum of seven years. The capital gains from the actual QOF will be tax-free when someone holds the funds for a minimum of 10 years.
Related Rules
The deferral of these capital gains is not going to be automatic. If someone wants to be included in the program, it is necessary to defer the gain by filing the Form 8949.
This form must be filed with the tax return the year that the tax would be due. When it comes to Qualified Opportunity Funds, it is necessary to be informed and know what is expected and needed.
This is going to help ensure that the desired results are achieved. In the long run, knowing this information will pay off.
