Opportunity Zone Investment

What is an Opportunity Zone?

Opportunity Zones were created in the 2017 Tax Cuts and Jobs Act to encourage long-term investment in economically distressed areas.  The mapped zones were designated nationally in 2018 and include urban and rural areas within Durham, Raleigh, Chapel Hill, and all of the Triangle counties – as well as throughout North Carolina.

Why invest in an Opportunity Zone?

The short answer:  for the tax benefits. Investment in an Opportunity Zone brings significant federal tax advantages:

For pre-existing capital gains.  Federal taxes due on pre-existing capital gains can be deferred and even reduced by up to 15%.  By reinvesting capital gains in a qualified investment in an Opportunity Zone within 180 days after realizing those capital gains, taxes on those capital gains will be deferred deferred until 2026. By leaving that Opportunity Zone investment in place for 5 years, the basis in that original investment is stepped up by 10%, permanently reducing the gain – and taxes due.  After 7 years, the tax basis of the original investment is stepped up an additional 5% – to 15%.

For all new Opportunity Zone investment.  If a qualified Opportunity Zone investment is held for 10 years, no federal capital gains taxes are due on the capital gains realized from the sale or exchange of the Opportunity Zone investment.  Any qualified Opportunity Zone investment held for 10 years or longer will benefit from a stepped-up tax basis to the then-current fair market value of that investment, meaning that no capital gains will be realized on the sale or exchange of the Opportunity Zone investment.

How to invest in an Opportunity Zone

The keys to successfully capturing the substantial benefits of investing in an Opportunity Zone are to invest through a Qualified Opportunity Fund meeting all requirements of the Internal Revenue Code and Treasury Department regulations and to maintain eligibility throughout the life of the Opportunity Zone investment – whether in real estate or in businesses operating within an Opportunity Zone.

Our Morningstar Law Group team can assist with all aspects of Opportunity Zone investment, from forming a Qualified Opportunity Fund to ensuring each investment maintains eligibility through changes in the business and real estate lifecycle.