Opportunity Zones

Opportunity Awaits in Chittenden County’s New Opportunity Zones:

What is it? In 2017, the Tax Cuts and Jobs Act designated new “Opportunity Zones” designed to funnel investment to distressed communities. Historically, when an investor wanted to reinvest funds without paying taxes on any gains from the sale, they would engage in a 1031 Tax-Deferred Exchange. This was a provision in Federal Tax Code that allowed for the reinvestment of funds, without any tax implications.

With the creation of the Tax Cuts and Jobs Act, new “Opportunity Zones” have been established to spur private investment in low-income communities. The hope being that the new Act would allow for an alternative deferral of capital gains, similar to the 1031 Exchange.

What is an Opportunity Fund? In order to invest in an Opportunity Zone, you need to create an Opportunity Fund. Funds will enable a broad array of investors to pool their resources in Opportunity Zones, increasing the scale of investments going to underserved areas. As noted in Code Sec. 1400Z-2, as long as taxpayers reinvest their capital gains within 180 days, taxpayers may defer paying tax on these capital gains until the earlier of December 31, 2026, or the date they sell their investment in the Opportunity Fund.

Substantial Improvement: The whole idea of the Opportunity Zones tax law is to connect investor capital with low-income areas of the country that may have the greatest need for reinvestment. Going along with the spirit of the law, IRC Sec. 1400Z-2(d)(2)(D)(i) states that qualified opportunity zone property held by a qualified opportunity fund must satisfy one of the following requirements:

• The original use of qualified opportunity zone property commences with the qualified opportunity zone fund, or

• The qualified opportunity zone fund substantially improves the property

How Does it Benefit the Investor? There are three major tax incentives for investing in Opportunity Zones.

1. Temporary deferral of capital gains.

2. A step-up in basis for capital gains reinvested in an Opportunity Fund. If the investment in the opportunity fund is held for at least 5 years, the basis is increased by 10%. This jumps an additional 5% if held for at least 7 years.

3. Permanent exclusion from taxable income of capital gains if the investment is held for at least 10 years.

See the Opportunity Zones in Chittenden County:

Data collected from the Economic Innovation Group and the State of Vermont Agency of Commerce and Community Development.