Investors have less than a week to take full advantage of a key tax benefit in opportunity zone funds. They can avoid taxes on 15% of previous capital gains invested in an opportunity zone fund held for seven years only if they make that investment by Dec. 31. The reason: The deferred taxes come due by Dec. 31, 2026.
After Jan. 1, 2020, investors will be eligible for a tax cut of only 10% on those gains so long as they hold the investment for more than five years. These cuts are essentially a step-up in the tax basis of those previous gains.
Tax cuts on previous capital gains are just one benefit of opportunity zone funds. The other is the tax cut on gains made from investments in opportunity zone funds themselves. If those investments are held for at least 10 years, their basis moves up to fair market value when they are sold or exchanged, which essentially eliminates any capital gains tax on the investment.
The tax benefits of investments in opportunity zone funds have received a lot of attention since they are the lure to attract money that can then be invested in economically depressed communities. Whether these funds will have a positive impact on those communities or on the portfolios of investors is as yet unknown and not just because of their long-term nature.
There have been multiple reports about political favoritism in the designation of opportunity zones, which has prompted calls for investigations by various members of Congress and the introduction of bills requiring more disclosure about investments in opportunity zone funds. One legislator, Rep. Rashida Tlaib, D-Mich., has even introduced a bill that would remove opportunity zones from the U.S. tax code, essentially killing their tax advantages.