With tax season in full swing, many people are anxious about their bottom line. For many investors, they are concerned about how much they will have to pay, and they fear that dreaded trip to the accountant’s office. It’s important to get every business write-off and deduction possible. However, one of the easiest ways to take advantage of tax benefits is unknown to many. It’s possible to profit from capital gains tax incentives through the Opportunity Zone program.

If you haven’t heard of the Opportunity Zone program, then you are not alone. It’s a program that is less than two years old. Though it’s somewhat new, it’s a great way to help diversify your portfolio and give back to poverty-stricken communities at the same time. What are the Opportunity Zones, and what are the possible benefits by investing in them?

Opportunity Zones are designated areas that meet specific criteria set forth by the Internal Revenue Service. The IRS uses the census data to decide which areas qualify for these benefits. For instance, the region must have a poverty rating of 20 percent, and the median family income cannot be more than 80 percent of the statewide median family income. More than 50 percent of neighborhoods in the U.S. were considered for this opportunity, using these guidelines, which is a staggering number to fathom. Nearly half of the country is in desperate need of help and resources to improve the economic stance.

The program was part of the Tax Cuts and Job Act, which was passed in 2017. The Act was meant to bring jobs and stable housing to areas along with tax reductions for those who divest in those regions. There are Opportunity Zones in all states as well as Puerto Rico, Guam, and the Virgin Islands. Each state can classify up to 25 percent of their low-income neighborhoods, and they retain the status for ten years. To date, the IRS has approved 8,700 zones into the program. These areas will not need to recertify to keep their status. Once they have been chosen, they will remain until the program closes.

Everyone knows that the government has many financial restraints. In the areas where the economy is bad, the city and state must pick up the extra costs that the taxpayer money doesn’t cover. The program was created to stimulate these communities that are in desperate need of help. In exchange for the contribution of private investors, the IRS is offering capital gains tax incentives. All the taxpayer money that comes into these areas is needed for schools, roadways, upkeep, and administration. There is no way to pull extra money to revitalize, so the government knew that using private funding was the only way.

Investors not only get an immediate gain, but they can also claim the deductions long term. The longer they hold onto the assets in the areas, the more incentives they receive. Other programs are meant to help encourage private investments, but these programs have many flaws. With the Opportunity Zone package, it doesn’t rely on government agencies to function, it’s less costly, and there are fewer restrictions. Once the IRS deems that area a qualified zone, they don’t have much else to do with it.

In time, this program may replace the New Markets Tax Credit and the Low-Income Housing Tax Credit offerings. There are many limits put on the number of credits that can be used in a tax credit system, so many investors are not interested in these programs due to the strict limitations. A new plan was necessary to improve the quality of life for many regions.

Investors interested in this program must invest through Opportunity Funds. To have such a fund, the business must capitalize at least 90 percent of their holdings into one or more of the approved zones. The IRS govern these reserves. To read more about them, check out section 1400Z-2 IRC/. Each depositor must make sure that they follow all the program guidelines to ensure they can take advantage of the tax incentives.

This program is meant to stimulate growth within selected communities; however, there are limitations on the kinds of investments that an Opportunity Fund can devote. The “Qualified Opportunity Zone property,” is defined as an interest in a business that is in one of the zones, owning stocks in a company that does most of the business in this region, or purchasing property in the neighborhoods.

The Rules of Claiming Tax Advantages from Investments in An Opportunity Zone

For those investors who are looking for new ways to make money, the capital gain tax incentives offered through this program can help offset the costs. Divesting in stocks or real-estate is considered a taxable event that comes with a capital gain or loss. The Opportunity Zone Program allows the investor to reduce and put off any tax liabilities.

On top of that, investors may also receive tax-free treatment for any future appreciation that comes from the Opportunity Fund. There is a timetable that investors must follow to be able to maximize the tax advantages. However, here are the benefits of using Opportunity Zones:

•Gain Deferral

Any gain made from the investment in a qualified Opportunity Zone can be deferred in the same calendar year that the deferral election is completed.

• Tax Exclusion of 10 Percent

All investments will receive a permanent tax exclusion of 10 percent of the taxable gain. The investment must be held for a period of up to five years to receive this exclusion.

•Tax Exclusion of 15 Percent

All investments will receive a permanent tax exclusion of 15 percent of the taxable gain. The investment must be held for a period of up to seven years. It will be 10 percent for the first five years, and then it will increase to seven percent for the subsequent two years.

•Tax Exclusion of 100 Percent

When the investment fund is held for up to ten years, then the permanent tax exclusion of 10 percent applies to the capital gain. The inclusion is from the sale or exchange of any investments that occur in the qualified zone. Only the capital gains accumulated from an asset in an opportunity fund applies.

The program will expire on December 31st, 2026. After this date, no gain deferments will be available. Gaines must be claimed at the earlier time if the investment is sold, or on the date, it expires. So in 2026, you can claim the fair market value of the asset. Should the benefits decrease in value, this will allow for the reduction. Any appreciation that occurs on the investment is not going to be recognized unless it’s held for a period of ten years. If you sell the investment, then you will be responsible for the tax implications.

Further details will be released in the next few months. Be sure to check the IRS webpage or contact our office for more information. It’s another way to invest that can help make money and have fewer tax responsibilities. Additionally, giving back to the poor areas of the country can make this program a win-win for all involved. If it’s successful, it can replace currently lacking programs, and they may extend it beyond its expiration date. Only time will tell.