Our Tax Chair, Jessica Millet, and I – are writing to alert you about Opportunity Zones.
We emphasize that this is one of the very few tax-advantaged investments that are currently available to investors. And it is not a tax dodge either – it was enacted into the tax code as part of Tax Reform in 2017. Here are the salient points:
If you have a capital gain – short or long term – from the sale of any asset, which could include real estate, sale of a business, sale of a division, sale of artwork, sale of stock in a public company, or just about anything else, then you can invest that gain into an Opportunity Zone.
Opportunity Zones are in locations designated by the states throughout the U.S. The locations are mostly in disadvantaged areas where the government wants to promote investment – hence, the reason that the Opportunity Zone legislation when it was adopted was bipartisan in nature.
An Opportunity Zone transaction is one where the sponsor either (i) does a real estate deal or (ii) opens a business in an Opportunity Zone plus carefully follows the detailed rules and regulations to make sure the investment qualifies.
An investor who invests a capital gain, of, say $1,000,000, has the following result:
- Normally the investor would pay capital gains tax of 20% (Federal) and tax taxes (up to 10% depending on the state) – i.e., $300,000.
- However, if the investment is made in the Opportunity Zone, that gain amount is not included in income until December 31, 2026.
- As a sweetener and incentive to invest early, the deferred gain amount of any investments that are made by December 31, 2021, are reduced by 10% at the time of the 2026 income inclusion.
- In addition, if the investment is held for 10 or more years and appreciates in value to, say, $5,000,000, then there is zero tax on the appreciation, i.e., in this hypothetical, the $4,000,000 of appreciation would not be taxed at all Federally (and also not taxed in some, but not all, states).
We understand that most Mondaq readers are not real estate players – i.e., you are in different industries. Opportunity Zones are one the best overlaps between non-real estate and real estate since the goal of the government is to encourage investment in Opportunity Zones.
Finally, there is a doing-well-by-doing-good aspect here too. These investments are very tax-advantaged for the investor and, at the same time, promote social good by generating investment in areas where it is difficult to attract investment dollars. In essence, the goal is to coax wealthy people – or businesses – to save taxes by investing in places they might not otherwise invest.
We also add something perhaps obvious – which is that irrespective of whether Opportunity Zones are an attractive investment for your organization, they may be extremely attractive for the owners and principals, who may have significant capital gains—e.g., from the stock market – that they can utilize as outlined above.
Finally – yes, we should mention – with close to 40 attorneys, paralegals, and non-lawyer professionals working in the D&S Opportunity Zone Practice Group, we are leaders in the space for tax, real estate, and strategic business-building advice. We have developed extensive expertise around this statute and its implications for the real estate industry. We are on top of the tax and real estate issues. We are already representing clients developing Opportunity Zone investment strategies and transactions – including representing a client with what we suspect is the largest Opportunity Zone transaction ongoing in the U.S. – and advising numerous clients on their Opportunity Zone strategies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.