Could investing in a qualified opportunity zone fund be a benefit?

Your Guide to State, Local, Federal, Estate + International Taxation

A great opportunity that the Tax Cuts and Jobs Act of 2017 brought to investors was the ability to invest in a qualified opportunity zone fund. There are many tax benefits to investing in a fund, but the most relevant is being able to defer gains to later years while not having to pay tax on the appreciation of that investment. There are qualified opportunity zones all around the valley, including Scottsdale, Mesa and Phoenix.

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How do you invest in a qualified opportunity zone fund?

A taxpayer who is going to have a gain from the sale of an investment, whether that is stock or a business, can take their gain from that investment and put it into a qualified opportunity zone fund, within 180 days of the date of sale, in order to defer the gain on that sale to a future year. The benefit of this program depends on how long that taxpayer keeps their investment in that fund. Once a taxpayer invests in the fund, in five years they get a 10% basis increase. Then after seven years, they get an additional 5% basis increase. On December 31, 2026, the taxpayer is required to recognize the gain. With it being 2022, taxpayers aren’t going to benefit from the basis increases since we are within five years from December 31, 2026.

Qualified opportunity zone fund extension in 2022?

On April 7, 2022 the Opportunity Zones Transparency, Extension and Improvement Act was introduced. This proposition would bring the opportunity of tax deferral and basis step ups back to investors. They are proposing that the deferral period should be extended from December 31, 2026 to December 31, 2028 and that the additional 5% basis increase be at six years instead of seven. This would allow investors to invest their gains into opportunity zone funds up until December 31, 2022 and still get the full benefit of the 10% basis increase and the additional 5% basis increase.

As we get closer to the end of the year, this proposed legislation is something to watch and can be a great way to defer a large gain on your 2022 tax return. If you think this is something you would be interested in learning more about, please contact your Henry+Horne advisor.

Andie Olson

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