IRC § 1400Z-2, under The Tax Cuts and Jobs Act of 2017, established an investment program designed to provide preferential tax treatment for investment in developments located within certain designated economically distressed communities known as "Opportunity Zones". All 50 states, the District of Columbia, and each of the five U.S. territories, have Opportunity Zones within their borders.
To qualify for preferential tax treatment, capital gains earned from a prior investment must be reinvested in a Qualified Opportunity Fund, which is a partnership, corporation, or limited liability company formed for purposes of investing in eligible property located within an Opportunity Zone.
Investment in a Qualified Opportunity Fund offers taxpayers three primary tax incentives:
1. Temporary deferral of tax on previously earned capital gains that are invested in a Qualified Opportunity Fund until the earlier of the date the opportunity zone investment is sold or exchanged, or December 31, 2026.
2. Reduction of capital gains tax liability through a graduated step-up in basis of the Qualified Opportunity Fund original investment equal to 10% if the investment is held for at least 5 years, and 15% if the investment is held for at least 7 years.
3. If the investment is held for at least 10 years, the appreciated value can escape capital gains tax through an increase in the adjusted basis of the Qualified Opportunity Fund investment to equal its fair market value on the date that the investment is sold or exchanged.
To qualify for the above incentives, gains must be invested in a Qualified Opportunity Fund within 180 days of the day on which the capital gains would have to be recognized (subject to certain exceptions for pass-through entities and certain types of capital gains) if not for deferral under IRC § 1400Z-2.
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