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Included in the Tax Cuts and Jobs Act passed in December 2017 was a seldom-discussed section purporting to spur investment through tax incentives in low-income communities across the United States. Under this section, governors may nominate qualifying census tracts in their respective states to be designated, “Opportunity Zones.” Businesses and individuals who invest in Opportunity Zones are able to minimize taxation through preferential treatment of capital gains.
Last month, Governor Ducey designated 168 tracts to be designated Opportunity Zones, the maximum allowable under the law. On Monday, the U.S. Department of the Treasury and the IRS certified Ducey’s selections. We are attaching the general parameter maps of the areas selected and are happy to talk more specifically if you have a question about a particular property or incentive. We have been studying this for a few months and now that it is finalized we are excited for the opportunity for increased investment potential in Arizona.
Opportunity Zones provide three primary tax benefits to investors who invest in the Opportunity Zones through the use of an Opportunity Fund. If you own property in one of these area’s we can help to set up the framework for investment.
- Tax on income for capital gains is temporarily deferred for capital gains reinvested in an Opportunity Fund.
- Capital gains reinvested in an Opportunity Fund receive a stepped-up basis, which will effectively exclude up to 15 percent of the original gain from being taxed.
- Capital gains from the sale or exchange of an investment in an Opportunity Fund are not taxed, so long as the investment is held for at least ten years.
Currently, businesses and individuals hold more than $2 trillion of unrealized capital gains, much of which is the result of profitable market investments. Prior to the Tax Cuts and Jobs Act, proceeds from the sale of those assets would be taxed at a maximum tax rate of 20 percent, plus a 3.8 percent surtax. Opportunity Zones offer an enticing alternative.
Instead of being taxed on those investments upon their sale, businesses and individuals may transfer those unrealized gains into an Opportunity Fund and receive very favorable tax treatment.
Now that the Treasury Department and IRS have certified Governor Ducey’s Opportunity Zone designations, investors are poised to create and invest in Opportunity Funds to spur economic development in communities across Arizona.
*This article is not legal advice or an advertisement but rather a general summary of a new opportunity that you may or may not be able to utilize in your development project.