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Opportunity Zone Funds – A Legal Way to Pay No Capital Gains Taxes?

The Trump Tax Law created a new type of investment vehicle called an Opportunity Zone Fund. An Opportunity Zone is an economically distressed community that is designated as such by a state, and then certified by the Secretary of the US Treasury. The purpose of these Funds is to spur economic development and job creation in distressed communities.

Here’s the great part with these funds….

In general, if you have capital gains, you can reinvest those capital gains, within 180 days, into an Opportunity Zone Fund, and defer the taxes on those capital gains.

There are certain holding period requirements to defer paying taxes on the gains.  If held long enough (generally 10 years) you can potentially eliminate all capital gains taxes.

In theory, an Opportunity Zone Fund can be a great way to defer or eliminate capital gains taxes. But it’s still very early to truly see the effect these funds will have. I suspect we will have many technical corrections to the law before the dust settles.

One aspect of an Opportunity Zone Fund that seems a bit concerning is that it becomes a Qualified Opportunity Zone Fund by self-certifying itself as such by filing a form with the IRS. I believe this will create somewhat of a gold rush mentality to set up funds and attract capital. My issue with this is that investors are then left to determine which funds are good and which ones are bad.

And if an Opportunity Zone Fund is not quite up to snuff and this is determined a few years into the fund to not be qualified, it could cause unintended consequences to investors and taxpayers.

It will pay to be cautious on the front-end of these new investment vehicles, but I don’t think it’s a reason to not use them as part of an overall investment and tax planning strategy.

So, in 2018, if you are facing capital gains from stock sales, business sales, real estate sales or other capital gains, it could make sense to defer some of that gain into an Opportunity Zone Fund.

Keep this in mind though – this is not intended to be specific tax or investment advice. Investments in Opportunity Zone Fund’s have some very nuanced tax rules that must be followed, so be sure to check with your tax and investment advisers to see if they make sense for your situation.

Further resources can be found below:

IRS Opportunity Zone Fund FAQ’s

US Treasury Opportunity Zone Resources

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