Opportunity Zone investment opportunity a hidden tax reform gem

Posted on Monday, September 24, 2018 by Molly Ryan

By Justin J. Vanderglas, CPA, tax manager, Clark Schaefer Hackett and Cathy Smucker, CPA, NCP, tax manager, Clark Schaefer Hackett

It’s hard to believe that summer has officially wrapped up, but with football season underway and the September extension deadline behind us, it’s a good time to focus on some of the new provisions in the Tax Cuts and Jobs Act.

At Clark Schaefer Hackett we have been digging deep to uncover some of the lesser known opportunities our clients will benefit from and we found just that under the newly established IRC Section 1400Z. Considered by many as a hidden jewel, this provision includes a new incentive designed to spur economic growth in low-income communities. Taxpayers throughout the country will be able to put their unrealized capital gains to work by investing in Opportunity Zones.

These zones have been designated throughout the country, including 320 separate census tracts in Ohio. To view a map of Ohio’s eligible tracts click here.

So, what’s the incentive to invest in these zones?

Investors can qualify for temporary and/or permanent deferral of tax on their capital gains when properly invested in a Qualified Opportunity Fund (QOF).

  • A temporary deferral is available equal to the amount of gain invested in a QOF within 180 days after the date the gain is triggered until the earlier of December 31, 2026 or the disposition of the reinvested property.
  • Once an investor has held their QOF for five years they will receive a step up equal to 10% of the original gain. Said another way, 10% of the originally deferred gain disappears.
  • Once the investor has held their new investment for seven years, another 5% of the gain permanently disappears, bringing the total to 15%.*
  • Once the QOF has been held for 10 years, the investor will receive a step up to fair market value at the time on the date of sale, thereby permanently removing all current and future taxes on the accrued appreciation of the investment.

If you think this incentive sounds powerful, I suggest you check out our recent article in which we’ve illustrated the benefit with some numerical examples. While Opportunity Zones have great potential, the lack of clarity around the rules are keeping most investors on the sidelines. Lucky for us, the wait won’t be much longer. The proposed regulations have been drafted by the Treasury and are currently being reviewed by the Office of Management and Budget’s Office of Information and Regulatory Affairs.

*Investors must remember that their capital gains tax will be triggered in 2026. This means to qualify for the full 15% step up they will have to invest in an Opportunity Zone by December 31, 2019.

Justin Vanderglas, CPA, is a tax manager at Clark Schaefer Hackett CPAs & Advisors in Ft. Mitchell, Ky. Cathy Smucker, CPA, NCP, is a tax manager at Clark Schaefer Hackett in Columbus, Ohio.


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