Opportunity Zone Tax Benefits Discussion

Temporary Deferral

Investors in an OpZone Fund will receive a temporary deferral of their taxable income on any capital gains that are reinvested. The deferred gain must be recognized on whichever date is earlier; the date on which the opportunity zone investment is disposed of or on December 31, 2026.

Step-Up in Basis

A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.

Permanent Exclusion

Investors will receive a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund

Potential Excess Return of $100 Capital Gain Re-Invested in 2018

*Assumed long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the Opportunity Fund and the alternative investment.

The goal of the Opportunity Zone program is meant to redirect private capital invesmtents that have a long term time horizon into select low-income communities around the nation. The incentives are solely meant to address the tax treatement of capital gains. The longer an investor holds a stake in a qualified Opportunity Zone Fund, the more beneficial treatment that investor will receive. The largest benefits are reserved for those stake holders that are invested for 10 years or more.

The figure above is used to illustrate how an investor’s available after-tax funds fare assuming different holding periods. Assumptions made include annual investment appreciation of 7% and a long-term capital gains tax rate of 23.8% (federal capital gains tax of 20% and net investment income tax of 3.8%). Under the current guidance, after 10 years an investor would see an additional $44 for every $100 of capital gains reinvested into an Opportunity Fund in 2018 compared to an equivalent investment in a more traditional stock portfolio generating the same annual appreciation.

Example: 10 Year Opportunity Fund Investment

Frank has $100 of unrealized capital gains. He decides to reinvest those gains in 2018 into an Opportunity Zone Fund targeting distressed areas of his state. The investment is then held for 10 years. Under IRS tax code § 1400Z-2, Frank is is able to defer the tax owed on the original $100 of capital gains until 2026. Further, the basis is increased by 15% (reducing the $100 of taxable capital gains to $85). He will only owe $20 on the original capital gains when the tax is owed. Further, since the investment in the Opportunity Zone Fund has ben held for at least 10 years, Frank owes no capital gains tax on the appreciation. Assuming that the fund investment grows 7% annually, the after-tax value of the original $100 investment in 2028 is $176. Frank has enjoyed a 5.8% effective annual return, compared to the 2.8% an alternative investment that is not an Opportunity Zone Fund.

Total tax bill in 2028: $20

After-tax value of investment in 2028: $176

Effective after-tax annual return on $100 capital gain in 2018: 5.8%