Opportunity zones are economic tools that allow people to invest in low-income areas in the US. Congress created the actin 2017 under the Tax Cuts and Jobs Act. Its primary purpose is to stimulate economic growth and create employment in low-earning communities. Besides creating employment, it also provides tax benefits to the investors, making it a win-win for everyone. Now, is it worth it?
What is an Opportunity Zone?
It refers to a new kind of investment offering that uniquely reduces capital gains tax. They were made to propel investment of capital gains in distressed communities. Investing in these areas may allow taxpayers to defer their capital gains. It happens if you invest money into a qualified opportunity fund and meet the requirements.
Definition of Qualified Opportunity Fund (QOF)?
A QOF is an investment conveyor that files either a partnership or corporation federal income return tax. It is created for investment in qualified opportunity fund property. This Investment vehicle comes with three main categories of benefits, and they include:
• Deferral of capital gains
• Step-up based on the deferred gain amount
• Tax-free gain on New qualified opportunity fund growth
Deferral of Capital Gain
If you sell an asset and the capital gain is recognized, you can choose to get any pa of the capital gain and reinvest the returns into a QOF. If the capital gain returns are reinvested into a QOF in less than 180 days of recognition of the gain, the amount invested will qualify for deferring the capital gain until:
• The tax year the QOF proceed is sold
• Or 31st December 2026
It means by this time, the capital gain amount that was deferred when the returns were invested in the QOF will be recognized, and takes will be paid. The capital gain tax rate is determined by the tax rate applicable during the year of gain recognition.
Partial Step-Up in Basis
In this category, if you hold an investment in QOF for five years, you get a 10% step-up based on the deferred capital gain. You get a 15% step-up based on the deferred capital gain if it's held for seven years.
Tax-free growth
It applies where interest gained in a QOF is held for ten or more years. In this case, the post-acquisition gains in the QOF will be exempted on the sale of the QOF interest, avoiding capital gains tax on the gain.
Is an Opportunity Zone Investment Worth Consideration?
You will have deferred taxes if you sell multiple assets with high value and pay taxes now with the low rates. Mostly, this is a winning approach, but you should also consider the probability of higher tax rates in the future with QOFs investment.
Although it's a risky affair, many investors consider QOFs as their long-term investments. In addition, other investors are withdrawing their investments.
Each person is different, and some people are comfortable paying tax at the current capital gains rates. However, others find the tax-free growth after ten years worth the risk. A QOF is worth consideration, but you need to consult your trusted tax and financial planning expert. They will help you understand the risks and gains of the investment of your choice.
Above is all the information about QOFs. Therefore, you have to decide which investment suits you and is worth the risk.
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