Long-term capital gains receive a benefit of being taxed at a lower tax bracket than ordinary income. However, a tax planning strategy used by taxpayers to increase this benefit is to defer the taxability of that gain to a future year.
The Tax Reform Act provided a program to defer capital gains called Opportunity Zone Investing. Through this program, a taxpayer can defer capital gains on the sale of an asset by investing those gains through a Qualified Opportunity Fund. Similar to other tax deferral programs such as the like-kind exchange regulations, there are reinvestment dates that must be adhered to. With the Opportunity Zone investment, the gain proceeds must be reinvested into a designated Opportunity Zone (OZ) within 180 days of the gain transaction.
There are three layers of benefits under this program.
Here is a simplified example showing the benefits of the Opportunity Zone investment.
As you can see in this simple example, the biggest benefit is the third layer. This benefit assumes that the investment appreciates in value. There is value in the other two layers whereby the payment of the tax on the sale of stock was deferred for over 7 years as well as reduced by 15%.
The program is new and there are a number of items that the Internal Revenue Service is currently reviewing and has promised to provide guidance on shortly. If you have a recently generated capital gains, please contact SVA to see whether the Opportunity Zone investment could benefit you.