Posted by Valderas Financial Solutions LLC

How Do Investors Benefit From The New “Opportunity Zone” Tax Break?

How Do Investors Benefit From The New “Opportunity Zone” Tax Break?

Investors that are nominated by the governors and approved by the Treasury department in the economically distraught communities can greatly benefit from the New “Opportunity Zone” tax break. As it name implies, the Opportunity Zone program is the new law passed by the Tax Cuts and Jobs Acts that offers tax benefits to the investors by encouraging them to invest in severely deprived communities. Through this law, the investors will be exempted from paying taxes and tax deferrals.

Why this new tax break law different from other tax incentive laws?

Although the legislative body of the United States had presented several similar act that would allow the investors to benefit from tax exemption through Renewal Communities and Empowerment Zone, but they were not as effective as the New “Opportunity Zone” tax break. It is because, this new act guarantees that there will be governmental intervention and offers liberality to the investors.

The New “Opportunity Zone” tax break presents these perks

The new tax break law entails that till the end of 2026, the taxpayers will not be permitted to pay taxes from the profits that is earned from their investments or through sale of an property, in under privileged communities. However, the taxpayers can only enjoy these benefits if they reinvest the profits gained from the sale of the property in the Opportunity Zone fund. This fund, as a consequence, invest the profits in the targeted business in the deprived community.

Moreover, if the Opportunity Zone Fund is held for the time period of 10 or more than ten years, then according to the new tax break act, the taxpayers will also enjoy the benefit of exemption from taxes from any additions that arise from financing in the fund.

This new tax break laws open a window of opportunity for investors or group of people who are engaged in commercial or industrial business as they pool up their money for making huge profits from investments or from sale of property. It is because they can postpone the taxes generated from capital gains till 2016.

Now anyone can create an Opportunity Zone Fund. They may include syndicators or investment financial institutions. But, of course, such establishment would require a fee.

The Joint Committee ranking

As this new tax break program is reflective of TCJA’s 10 year budget opportunity, the Joint Committee ranked this new law as a means of losing revenue rather than opening windows for budgeting. The reason being that the amount of gain that escapes the present taxation law, is deferred till 2026. However, as opposed to the incentive programs that were offered previously by the TCJA, the Opportunity Zone program offers much more generous encouragements to the investors and syndicators. Although the revenue loss is noticeable but comparing to the level of development that is guaranteed through the Opportunity zone fund, it is bearable.

Opportunity Zone programs make business far-reaching

Keep in mind that businesses who are engaged in Opportunity Zone programs are more across-the-board. It is because these programs also encourages business to invest through the selling of residential or rental properties. Such investment plans were not included in the former tax incentive programs. And due to this drawback, such businesses that were not engaged in selling of property were not constructive for the deprived communities. 

Are Opportunity Zone Programs without any faults?

One of the main issue with the Opportunity Zone fund is that it is hard to draw connections between the size of the existing tax costs and communal perks earned from investments. It is possible that in order to gain the incentives from this new tax break law, the investors may try to reform the existing business structure or modify the pre-planned projects through sale leasebacks. In this way, the transaction serves the role of a loan where payments take the form of rent.

Or, it is also possible that by leveraging the Opportunity Zone program, the taxpayers may invest in those communities and neighbourhoods that have undergone gentrification previously and are nominated by the governors as well. In this way, the focus is removed from the main purpose of New “Opportunity Zone” tax break law presented by TCJA.

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