The latest tax reform passed in the Tax Cuts and Jobs Act (TCJA) enacted sweeping changes to the U.S. tax code. Among them is a program with the potential to provide a powerful boost to low-income communities and significant tax incentives for investors.
The newly enacted legislation introduced Opportunity Zones, low-income areas that enjoy a new federal tax incentive which will drive long-term private investment to them. The areas are selected by the governor of each state and can include up to 25 percent of the low-income census tracts in that state. Though Opportunity Zones are advertised to benefit low-income areas, the actual results of selected neighborhoods in some cases are quite surprising. Census tracts are rather small, and not all are in the traditional inner-city areas that might be expected. Small town America and pockets of generally prosperous areas that are in decline are also included. With this program, individuals have the opportunity to invest in emerging markets and assist with the growth of disadvantaged communities.
Opportunity Zones in Michigan include neighborhoods in almost all 83 counties, including Indian Village, downtown, Midtown, Grandmont Rosedale and East English Village.
The program’s goal is to allow taxpayers to reinvest gains sales of property into qualified Opportunity Funds, rather than pay tax this year on those gains. This investment will be used to capitalize existing businesses, provide funding for new businesses, or fund real estate development. The gains eligible for tax deferral through the investment in Opportunity Zones include gains from the stock market, rental properties and other investments.
Individuals who invest in qualified zones and hold it for 10 years can not only defer tax on current-year gains, but also pay no tax on any gain from the eventual sale of the Qualified Opportunity Fund. Here’s the summary:
- Investors can defer their original tax bill until the expiration on December 31, 2026 at the latest, or until they sell their Opportunity Fund investments, if earlier.
- A 5-year holding increases the rolled-over capital gains basis by 10 percent, decreasing the amount of the original gain recognized.
- A 7-year holding increases the rolled-over capital gain investment basis 5 percent for a total of 15 percent.
- Gains from the eventual sale of the Opportunity Fund equity held in the fund for at least 10 years is not taxed.
Any experienced investor can attest to it being unwise to make an investment without considering both the tax and economic implications. While there are significant tax benefits to investing in designated Opportunity Zones, it is important to consider the economics of the underlying investment.
Rehmann offers tax and business planning services to help clients evaluate opportunities, fostering strategic investments to develop long-term rewards. If you are interested in investing in an Opportunity Zone or would like additional information, please call Carol Wright at 248.614.6454 or email her.
For other questions about tax reform or insight into how Rehmann can help, call 866.799.9580.