WEALTHBUZZ by WealthEngage

Gustavo J. Vega, CFP®, ChFC, APMA Co-Founder, WealthEngage

Opportunity zones started at the end of 2017 when President Trump signed into law the Tax Cuts & Jobs Act (TCJA) which reduced tax rates for businesses and individuals and increased standard deductions and child tax credits, but it also limited the benefits of itemizing deductions and set the limit on state and local tax deductibility to $10,000. These new rules (and many others) have already been well documented. However, I keep getting questions about another new component of the TCJA – Opportunity Zones.

Thanks to a long recovery from the depths of the Great Recession, many of our real estate and investment portfolios have not only recovered their losses but in fact are at or near historic highs. As a result, there are trillions of dollars in unrealized capital gains sitting on the sidelines.

1 The Opportunity Zones program provides tax incentives to developers who invest in historically distressed neighborhoods throughout the U.S. There are 8,700 communities that have been designated as Opportunity Zones. In New York City, there are 306; Los Angeles County has 274; Chicago Cook County, 181; and Miami-Dade County has 67. Created by Republican Sen. Tim Scott of South Carolina and Democratic Sen. Cory Booker of New Jersey, it is intended to spur investment in places institutional money might otherwise overlook. That development in turn, would help the communities and businesses.

These tax incentives encourage investors to realize their gains and reinvest them on a tax-deferred basis into Qualified Opportunity Funds (QOF), which must invest in businesses and real estate within the 8,700 zones mentioned above. In return, investors realize three main tax benefits:

  1. Tax deferral – Any capital gains reinvested into a Qualified Opportunity Fund within 180 days of the realization are not taxed until December 31st, 2026
  2. Potential reduction of the capital gain deferred – On December 31st, 2026, taxes on the original deferred gain come due and are reduced based on the holding period of the QOF investment on this date:
    1. ⦁ 15% reduction if held for 7 years
    2. ⦁ 10% reduction if held for 5 years
  3. Exclusion of capital gains tax on sale of Qualified Opportunity Fund
    1. Any capital gains generated from QOF investments are exempt from taxation, so long as the investment is held for at least 10 years and the gain is realized prior to January 2048.

As with any investment decisions, there are several factors to consider besides tax savings. However, this new program may be an interesting opportunity, pardon the pun, for many investors with a long timeframe. https://therealdeal.com/miami/2018/09/28/heres-every- thing-you-need-to-know-about-opportunity-zones/

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James financial advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact our office for information and availability.

© 2019 Raymond James Financial Services, Inc., member FINRA/SIPC | Privacy policy. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. WealthEngage is not a registered broker/dealer and is independent of Raymond James Financial Services. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website‘s users and/or members.

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