United States

Opportunity Zones: IRAs for Capital Gains

10th Annual RSM New York Investment Industry Summit

INSIGHT ARTICLE  | 

Participants at our 10th Annual RSM New York Investment Industry Summit gained insights on how new opportunity zone tax incentives can make reinvesting capital gains in economically distressed communities very rewarding.  However, everything depends on the return.

The 2017 Tax Cuts and Jobs Act created tax incentives for reinvesting capital gains in economically distressed communities. The opportunity zone program is particularly valuable forong-term reinvestments of short-term capital gains by the use of a deferral mechanism

With its combination of tax deferral and partial exclusion, the program offers great tax planning benefits for large capital gains recognized currently

Tax-free gains

For example, an investor decides to reinvest a short-term capital gain of $100 in one of the federally designated qualified opportunity zones (QOZs).

The investor will pay deferred tax after eight years on only 85 percent of the original investment.

At the end of 10 years, the investor can realize gains on the QOZ investment tax-free.

If the investment gained 10 percent annually, the investor would make $218 for the period.

That’s $87 more than the $131 he would have if he had paid short-term capital gains tax on his $100 and reinvested the remaining $59.20 at 10 percent.

A few caveats

  • The size of the benefit depends entirely on the return. If the return were 7 percent, the benefit would be $25 for reinvesting a short-term capital gain (and only $3 for reinvesting a long-term capital gain).
  • Operating income on investments is taxable.
  •  A QOZ might lose its status in the long term.
  •  The program already has stimulated a fair amount of competition for reinvestment opportunities.

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