By James Fleming

What are Opportunity Zones?
                Opportunity Zones have attracted a lot of publicity since they were created in 2017. The Tax Cuts and Jobs Act created tax incentives designed to encourage investors with capital gains to reinvest those gains into low-income and undercapitalized communities. These low-income areas are called Opportunity Zones, which are designated by each state. Investors can now help spur economic growth in Opportunity Zones throughout the United States and in turn defer, reduce, and potentially eliminate taxes on the re-invested capital gains.
                Because capital gains taxes are disproportionately paid by high-net-worth households (since they are more likely to own assets that generate the taxable gains), Opportunity Zone investments are often thought of as geared toward long-term investors with a high net-worth. However, for anyone in the robust real estate and stock market who has a significant amount of capital gains and wants to shelter them, Qualified Opportunity Zones may be the right investment opportunity.
                The reinvestment is put into Qualified Opportunity Zone Funds (which are the investment vehicles that invest and professionally manage your money) that invest the assets into Opportunity Zone projects. The Qualified Opportunity Zone Funds can finance a broad variety of activities and projects. Funds can finance affordable housing, small business development, commercial and industrial real estate, and other projects focusing on the community.
                Here is an example of how Qualified Opportunity Zone investments work, along with the 3 tax benefits of this law – tax deferral, tax reduction, and tax elimination for an investment held 10 years: Let’s say you just sold Apple stock and earn $1million in capital gain. Under normal circumstances, you may owe $200,000 in capital gains tax. However, if you instead reinvest your $1million of capital gains into a Qualified Opportunity Zone Fund within 180 days of the sale, then you can defer the entire capital gains tax on the $1million dollar sale until December 31, 2026. So, instead of paying those $200,000 in taxes in 2020, you don’t have to pay until the end of 2026. If you continue to hold that investment in the Opportunity Zone for five years, then you only pay tax on $900,000 (that’s 10% less) of the $1million dollar original capital gain. But the biggest benefit overall for the program is that if you put that money into a new investment for at least 10 years, then you pay no capital gains tax on the appreciation (although, North Carolina residents, unlike residents of most other states, cannot escape the state taxes).

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What are the Tax Benefits of Opportunity Zones?
Opportunity Zones provide three potentially significant tax benefits for investors.
               1. First, gains that are reinvested in Qualified Opportunity Zone Funds are not taxed on those capital gains until the earlier of December 31, 2026, or the date on which the Opportunity Fund is sold or exchanged. This puts a timetable on when you should invest because the ability to defer for five years will go away after this date. The ability to defer taxes on the capital gains allows more of the reinvestment to compound over time, potentially resulting in higher returns.
               2. Second, investors can receive a step-up in basis on existing capital gains invested in the Opportunity Zone Fund. Capital gains kept in the Opportunity Zone Fund for at least 5 years will receive a 10 percent increase in basis. Thus, the tax liability on up to 10 percent of the invested capital gain is wiped out by these step-ups. Notably, December 31, 2021 is the final date to receive any basis step-up on the original gain. After this date, the 10% step-up in basis after a 5-year hold goes away, as it is no longer possible to achieve a 5-year hold prior to the end of 2026.
               3. Third, if the Opportunity Fund holds the capital gain for at least 10 years, then the investor doesn’t pay tax on any of the appreciated capital gains they invested in the Opportunity Funds.  What Type of Investor Would Benefit from Opportunity Zones?

                As mentioned above, Opportunity Zone investment is not for everyone. 10 years is a long time to wait on investment, and much can change in that time, politically, economically, and otherwise. The money isn’t liquid, you have to hold it in the investment for at least 10 years to receive the full tax benefit, and you won’t receive the benefits if you pull out early.
                Opportunity Zones are an opportunity for many people to make money, enjoy tax benefits, and at the same time benefit communities. An Opportunity Zone investment is complicated and there are many details that this blog does not cover. We recommend you work with a professional in considering whether Opportunity Zone investments are right for you. You can contact your attorney at Strauss Attorneys, PLLC (or if you prefer, James Fleming at, and we can discuss this opportunity with you and involve professionals who understand and implement Opportunity Zone strategies with investors.

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