There’s one section in the 2017 tax cut legislation that most financial advisors know little about but probably should get acquainted with, especially if they have clients interested in impact investing.
It’s the section that allows the creation of opportunity zone funds, designed to promote economic development in low-income neighborhoods through private tax-advantaged equity investments.
Investors who roll over capital gains into an opportunity zone fund within 180 days can defer those gains until their investment in the fund is sold or until Dec. 31, 2026, when the tax provision sunsets. (see the tax legislation, Section 1400Z ‘‘Subchapter Z — Opportunity Zones”).
In addition, their investments in an opportunity zone fund receive the tax advantage of a stepped-up basis if they are held for five years or longer. At five years the basis is increased by 10%; after seven years 15%; and at 10 years, it’s increased to the market at the time of sale.
The funds are required to invest at least 90% of their assets in designated opportunity zones, in real estate, local businesses and other business assets located in a qualified opportunity zone, issuing stock, partnership interests or business property to their investors. The funds themselves certify that their investments align with the law.
Matt Temkin, a managing member of North Coast Partners, a real estate investment company, says opportunity zone funds are a good investments “for high-net-worth investors looking to solve tax issues and a chance to do good.” There were roughly $6 trillion in unrealized capital gains as of the end of 2017.
Temkin’s firm is in the process of raising funds for its Detroit Opportunity Fund, which will focus on investing in newly designated opportunity zones in the Detroit area, in which North Coast Partners currently operates.
To date, the Treasury Department has certified more than 8,700 Census tracts across all 50 states plus Washington, D.C., and territories as opportunity zones — zones that were nominated by governors and other chief executives.