• Stephen Olmon

No Tax On My Capital Gains?

Several friends have shared with me that they appreciate the brevity of my blog posts - I love that feedback, but I'm breaking the mold today! Buckle up.

The "Investing In Opportunity Act", which was introduced to the Senate in April of 2016, began the authorization process of designating "opportunity zones in low-income communities and to provide tax incentives for investments in the zones, including deferring the recognition of capital gains that are reinvested in the zones."

Ultimately, this was passed and included in the new tax bill. This is a very, very big deal. Let's break down Opportunity Zones and their purpose in more detail.

The foundational intention of Opportunity Zones is to spur economic development in low economic areas by providing tax benefits to investors.

As Steve Glickman said on the Meb Faber podcast (link below), there have been similar programs in the past but the incentives were not significant enough to motivate long-lasting investment in these communities.

Glickman, who led the group that architected the Opportunity Zone program, worked alongside a storied entrepreneur that many are familiar with - one Mr. Sean Parker. Yes, the Napster, Facebook, Plaxo Sean Parker...wait, what?! Why is he involved? Parker positions himself as a philanthropist, but capitalism is in his blood. So, what are the advantages to investing in Opportunity Zones?

  • Investors who have capital gains can defer paying their capital gains tax until December 31, 2026, for gains that are reinvested into a qualified Opportunity Fund (think a 401(k)).

  • If investors remain invested in their Opportunity Fund for longer than 5 years, they receive a 10% discount on their original capital gains tax bill, and a total of a 15% discount on their capital gains bill after a 7-year investment.

  • For the most patient investors, those who hold their stake in an Opportunity Fund for 10 years or more, they will pay no capital gains taxes for any appreciation of their investment in the fund for as long as they remain invested in that fund (think a Roth IRA).

Opportunity Zones will indeed provide much-needed investment in low economic areas, but the truth is that the same people who already take tax laws to the edge have a new, fun tool called Opportunity Zones.

Some critics are already voicing concern. Adam Looney, who is the Director at the Center on Regulation and Markets, said that "a state’s Opportunity Zones could also serve as a subsidy for displacing local residents in favor of higher-income professionals and the businesses that cater to them—a subsidy for gentrification."

Real estate is the obvious investment as the zones are tied to specific geographic tracts of land. However, many venture capital and private equity groups are looking at leveraging Opportunity Zones as well.

If you would like to dive into this subject more you can listen to this thorough podcast, read the IRS FAQ, and check out this quick read on Forbes.