Section 1: Introduction to the Opportunity Zone Tax Incentive
The introductory sections to the Investment Prospectus should set the stage for investors to immediately familiarize themselves with your respective city, as well as the contents of the investment prospectus itself.
While many national investors are likely familiar with the Opportunity Zone Tax Incentive, it's useful to include a brief introduction to the policy for local investors or others who may not be familiar with the technical details and mechanisms of the incentive.
Generally, the provision provides the following incentives for investing (courtesy of the Economic Innovation Group, and illustrated in the Louisville Investment Prospectus to the right):
- A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
- 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.
- 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.
Furthermore, the tax law envisions four parties in an Opportunity Zone transaction: the Taxpayer, a Qualified Opportunity Fund, a Qualified Zone, and Projects (in the form of Property and Businesses). The Investment Prospectus adds a fifth—the community itself as a key partner and player in shaping the investments within their communities. The slide to the right illustrates these four parties, in addition to differentiating features of the incentive compared to other tax incentives.
For more information about the incentive, see the following links:
- Internal Revenue Service: Treasure, IRS issue proposed regulations on new Opportunity Zone tax incentive
- IRS Proposed Regulations for Opportunity Zones (REG-115420-18)
- IRS Special Rules for Capital Gains Invested in Opportunity Zones (Rev. Rul. 2018-29)
- Internal Revenue Service: Opportunity Zones Frequently Asked Questions
- Economic Innovation Group: Opportunity Zones Frequently Asked Questions
- Economic Innovation Group Opportunity Zone Fact Sheet