By investing into an Opportunity Fund, investors can not only defer and reduce their existing capital gains tax liability, but also eliminate future capital gains tax on returns earned from the Opportunity Fund.
With the tax reform enacted December 22, 2017, a new tax incentive program was created to foster investment in designated areas. In return for investing capital into these targeted areas, investors are eligible to receive deferral and reduction of current capital gains and no tax liability on future capital gains from the Opportunity Zone investment.
Any taxpayer can defer capital gains in an unlimited amount from the sale of any property to an unrelated person by investing part or all of the proceeds from such sale or exchange in an Opportunity Fund. The property sold can be stock, business assets, personal assets, or any other property. To defer a gain, a taxpayer must invest proceeds from the sale in an Opportunity Fund within 180 days, beginning on the date of the sale, in an amount equal to the gain to be deferred.
In 2018, an individual investor sells 1,000 shares of Amazon stock that they purchased in 2013 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead of paying the $238,000 in federal capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified Opportunity Fund that invests in a real estate development project located in Opportunity Zones with a plan to liquidate in 2028. The assumed value of this investment in 2028 is $2 million. The benefits received by this investor include: