Opportunity Zone investors face deferred capital gains tax bill
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Some high-earning investors who deferred capital gains taxes through a special set of funds will soon have to pay a tax bill.
Authorized under the Tax Cuts and Jobs Act of 2017, Opportunity Zones are economically distressed communities nominated by states and approved by the Treasury Department. Promoting so-called investments Qualified Opportunity Funds – created to invest in specific areas – Congress included several tax incentives related to capital gains.
For starters, investors who stay in the fund for 10 years generally won’t owe taxes on the gains they make on their investments. Additionally, investors who put capital gains from another investment into the fund were able to defer paying taxes on that money. Investors who enter early enough can also reduce the amount of deferred gains that will ultimately be taxed.
The end of this year marks the end of the deferral period, and according to a new report, the total value of deferred earnings was $75 billion at the end of 2024. worksheet From the Treasury Department’s Office of Tax Analysis.
“Regardless of when investors deferred their gains from 2018 to the present… the deferral period will end on Dec. 31, 2026, and all gains will be taxable as of that date,” said Jason Watkins, partner at accounting firm Novogradac & Co. and an expert on Opportunity Zones.
Opportunity Zone investors get richer
According to the Treasury’s research, there are approximately 12,800 Qualified Opportunity Funds by the end of 2024, and there are approximately 41,000 investors in them. Funds can invest in various projects, such as new projects. housing, property upgrade, a start-up business or other suitable local initiative.
Approximately 85% of investors are individuals; According to the research, the rest are companies. The typical individual investor’s gross income was $738,000 in 2024.
Capital gains tax applies to profits from appreciated investments, and the tax rate depends on how long the investor has owned the asset. For those held for more than one year, gains are considered long-term and are taxed at 0%, 15%, or 20%, depending on the taxpayer’s income. Short-term gains (profits from investments held for one year or less) are taxed as ordinary income.
I hope they planned for this and realized they would owe taxes on those profits.
Ryan Firth
Certified financial planner
Investors who enter the Qualified Opportunity Fund by the end of 2019 using realized capital gains not only defer taxes on those gains until the end of this year (assuming they haven’t already cashed out or otherwise lost eligibility), but they can also receive a 15% increase on the basis of deferred gains. This means that 85% of deferred earnings will be taxed instead of 100%.
Investors who invest until the end of 2021 are entitled to a 10% increase. Those who miss these deadlines do not receive any additional benefits other than deferring taxation of their invested earnings.
“Hopefully they planned for this and realized they were going to owe taxes on those gains,” said Ryan Firth, a certified financial planner and certified public accountant based in Bellaire, Texas. “And I hope they set aside money to pay the taxes.”
Some funds may have provided liquidity to investors to cover taxes through debt financing or other distributions, Watkins said. While the benefit of deferring gains is over, the big payoff for investors has yet to materialize (they get tax-free gains after holding their investments for a decade), so many are likely to continue investing beyond this year, he said.
“I expect very few investors to cash out to cover taxes because getting a 10-year hold unlocks the world’s most valuable assets.” [incentives]This is a potential tax-free exit,” Watkins said.
Some of the tax benefits will change starting from 2027.
Tax incentives for rural investments are being increased
Minister The “big, beautiful bill” that Donald Trump introduced last summer made Opportunity Zones permanent. Legislation requires new regions to be designated every 10 years; The next round of nominations is currently ongoing and will take effect on January 1, 2027. Economic Innovation GroupThe think tank that came up with the idea of these funds.
Instead of having at least one of the tax benefits depend on the timing of the investment in the fund, all investors will be entitled to a five-year capital gains deferral, at which point they will receive a 10% increase in basis.
“Regardless of when investors make their investments, both the five-year deferral and the perpetuity of the 10 percent base increase provide greater certainty for investors,” Watkins said. he said.
In addition, investing in funds focused on rural areas brings an extra tax advantage; Watkins said these investors will receive a 30% increase after five years based on their initial deferred earnings.
