One of the least publicized yet significant provisions of the U.S. tax overhaul is a new program offering tax breaks for investing in economically distressed communities.
The Opportunity Zone provision of the Tax Cuts and Jobs Act allows investors to defer capital gains from the sale of appreciated assets by rolling the gains into vehicles, known as Qualified Opportunity Funds, designed to spur economic activity in poverty-stricken parts of the U.S.
The aim is to foster growth in urban and rural areas that have lagged behind the national rate of economic expansion, according to a new UBS Chief Investment Office (CIO) report . Investments that could qualify under the program range from affordable housing and commercial real estate development, to financing for startups, infrastructure and energy, such as solar power.
“Opportunity Fund investments potentially provide another alternative for investors seeking to allocate a portion of their portfolio to place-specific impact investments,” says Andrew Lee, Head of Sustainable and Impact Investing for UBS, who co-authored the report.
Under the program, investors can roll unrealized capital gains into a Qualified Opportunity Fund (QOF) and defer federal taxes on those profits until the earlier of sale or exchange of the QOF or 12/31/2026. Investors are eligible for increasing levels of tax relief if they keep their investment in the Qualified Opportunity Fund for at least five or seven years, and can permanently avoid capital gains taxes on any gains accrued on the Opportunity Fund investment if they retain it for at least 10 years.
The program “implicitly promotes a longer-term investment perspective by offering the biggest tax breaks to investors willing to commit capital for at least a decade,” says Jonathan Woloshin, CFA, Head Americas Equities, UBS, another co-author of the CIO report.