The Tax Cuts and Jobs Act created a new tax incentive program through investment in “qualified opportunity funds”. Qualified opportunity funds are intended to encourage investment in low-income communities by providing three tax incentives to investors:
- Investors can defer taxes on eligible capital gain arising from a sale or exchange of assets by investing in qualified opportunity funds.
- 10% of the deferred gain may be permanently excluded from federal income tax by way of a step-up in basis if an investor holds its interest in the qualified opportunity fund for at least five years, with an additional 5% basis step up if the investment is held for seven years.
- If the investor holds the investment in the qualified opportunity fund for at least 10 years, an elective basis adjustment made upon sale of the interest in the fund provides a permanent exclusion from taxation for any appreciation in excess of the originally deferred gain.
Click for the full client alert with an update on recent IRS guidance relating to the opportunity zones program.