By Carlos Jose Rodriguez Sr | Forbes
The opportunity clock is ticking. As a critical deadline in the qualified opportunity zone program approaches on December 31, 2021, investors are finding the potential tax benefits of the program increasingly attractive — in no small part because capital gains tax rates are almost certain to go up in the weeks ahead.
Just to recap, the opportunity zone program was created as part of the Tax Cuts and Jobs Act of 2017 to incentivize private capital investments in low-income communities. Initially, investors shied away from allocating dollars to qualified opportunity funds (QOFs) due to their complexity. Over time and with additional guidance and clarification from the IRS, the program has gained momentum — and by the end of 2020, investors had poured over $15 billion in equity into QOFs, according to Novogradac.
Now, with Congress contemplating raising capital gains taxes from 20% to 39.6%, investors are even more eager to allocate realized capital gains into tax-free vehicles. Thus, opportunity zone funds have become an attractive option for gain harvesting. While deferred capital gains ultimately pay taxes at the applicable rate at the time of realization (i.e., they will likely be greater in the future than today), the ability to pay no taxes on the “new” capital gains generated by opportunity zones investments is extremely attractive, especially given the potential future rate of 39.6%.
“As we enter the final quarter of 2021, investors and those interested in opportunity zones need to be aware that an important program benefit expires for investments not made by year-end. Under the program, capital gains tax on an opportunity zone investment is generally deferred through 2026. If that investment is held for at least 5 years prior to December 31, 2026, the gain taxed after the close of 2026 would be reduced by 10%. Working backwards, this means the investment must be made on or before December 31, 2021 in order to qualify for the 10% gain reduction. With potential capital gains tax increases looming, opportunity zone investments may, for many, be worth considering.”
–Dan Gauthier, Rose Law Group Attorney