Tax Advantages to the investor
Any capital gain recognized after Jan 1, 2018, can be deferred if invested in an opportunity zone fund within 180 days of a sale. The deferral of the gain will be recognized the earlier of 12/31/2026 or the date the investment is sold.
The deferred gain is reduced by 10% if held 5 years and an additional 5% for a total of 15% if held 7 years.
The bottom line is that only 85% of the deferred gain is paid in 2017 if held 7 years.
The bigger advantage is that the gain on any new investment into the opportunity zone fund is totally tax free if held for 10 years. It is important to note that only investments from capital gains invested within 180 days of the gain will get the tax free benefit after 10 years.
Special Rules for Partnerships and other Pass through Entities
If a partnership (or other entity such as S Corp)has a capital gain and does not elect a deferral at the partnership level the individual investor (partners) 180 day period for investing in an opportunity fund starts on the last day of the taxable year of the partnership. if a partner is made aware of the date and amount of a capital gain, the partner can use a 180 day period starting on the date of the gain. Making the election to use a 180 day period starting on date gain is recognized allows an opportunity zone investment to be made prior to the partnership's year end.
Exclusion is on a Transaction by Transaction basis.
The maximum exclusion is only against capital gains. A gain does not need to be reduced by capital losses.
This means that if the gain is $100,000 and a loss of $25,000. The maximum deferral is $100,000. Even though the $25,000 loss will be carried over in excess of $3,000, The taxpayer may want to defer the full $100,000 it order to increase the investment that will get the tax free treatment after 10 years.
Because getting a deferral against a short term capital gain is usually more valuable that getting the deferral against a long term capital gain, it will likely be in the interest of the taxpayer to allocate the deferral against transactions generating a short term gain. When all short term gains are used up, then allocate to the long term transactions.
It is beyond the scope of this web site to discuss all tax deferral and tax avoidance issues of opportunity zone investing.