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About the Opportunity Zone program
The OZ Program is a federal tax incentive program intended to promote investments in economically distressed communities across the country. Through the program, investors can inject capital into low-income communities and promote long-term economic growth through a variety of investment vehicles. Investors may also be eligible for significant tax benefits that include tax deferral for capital gain invested in a qualified opportunity fund (QOF); elimination of up to 15% for historic investments (and up to 10% for investments made before December 31, 2021) of the tax on the capital gain that is invested in the QOF; and potential full elimination of tax when exiting a QOF investment.
The potential tax benefits
- Capital gains deferral
- Basis boosts
- Gain exclusion
Capital gains deferral
The OZ Program provides temporary capital gain deferrals through 2026 if certain requirements are met. Under the new law, eligible capital gain from the sale or exchange of property by a taxpayer to an unrelated person that is invested in a QOF within 180 days of the sale of that property is excluded from the taxpayer’s gross income until the earlier of the date the investment in the QOF is sold or December 31, 2026. The Opportunity Zone Program rules provide various measurement dates for the 180-day rule (for example, in the case of a partner of a partnership that has realized capital gains), so it is critical that the taxpayer’s advisor is involved in determining when the 180-day period begins.
Basis boosts
The taxpayer’s basis in the QOF initially is zero but can be increased by 10% of the deferred gain if the investment is held for five years and increased by an additional 5% if the investment is held for seven years in total. Effectively, if gain on the sale of property was invested in a QOF before December 31, 2019, taxpayers may be able to decrease the taxable portion of the originally deferred gain by 15% (an overall basis step-up of 15%) and effectively, if gain on the sale of property is reinvested in a QOF before December 31, 202, taxpayers may be able to decrease the taxable portion of the originally deferred gain by 10% (an overall basis step-up of 10%).
Gain exclusion
If an investment in a QOF is held for at least 10 years, the taxpayer will recognize no gain on the appreciation in the asset from the time of the initial investment in the QOF through the ultimate sale (10-Year Gain Exclusion).
How PwC can help
PwC can provide a complete suite of tax, assurance, and advisory services related to all phases of an opportunity zone fund investment lifecycle. We help with identifying qualifying opportunity zone investments, assisting in structuring opportunity zone investments to accomplish the specific goals of investors (e.g., corporations, high net worth individuals, or asset managers), advising on the operation of the opportunity zone investments, and the investor’s eventual exit from the opportunity zone investment. Our offerings include:
- Identifying avenues for taxpayers to utilize the Opportunity Zone Program
- Identifying various Opportunity Zone Fund structures for consideration and assisting with the implementation of the selected structure
- Confirming that an investment in an Opportunity Zone Fund qualifies for the benefits of the program
- Determining if state and local tax benefits may also be available
- Ongoing tax consulting and compliance related to the status of the Opportunity Zone Fund and its tax operations
- Assisting in the disposition of Opportunity Zone Fund qualifying properties and interests in Opportunity Zone Funds
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