Opportunity Zones (part 2)

Michelle Bertram and Beverly Bertram are financial advisors living in Mineral Point WI and serving the surrounding communities. Michelle Bertram does financial planning for retirees along with business consulting. Beverly Bertram specializes in retirement planning and income planning for her clients. Michelle Bertram and Beverly Bertram are authors of the book, Creating You DREAM Retirement and creators of the DREAM Retirement Process. Serving Madison WI, Verona WI, Mount Horeb WI, Barneveld WI, Dodgeville WI, Dubuque IA, Platteville WI, Lancaster WI, Cuba City WI, Fennimore WI, Darlington WI, Monroe WI, Spring Green WI, Black Earth WI and beyondOpportunity Zones were created in the 2017 tax reform to encourage investors to reinvest their capital gains into these areas, in exchange for certain Federal (and possibly State) capital gains tax advantages detailed below.

Deferral of Capital Gains Taxes: Capital gains (short‐term or long‐term) from the sale of any asset that is reinvested in an Qualified Opportunity Funds (QOF) within 180 days following the disposition of that asset, shall be excluded from the gross income until the earlier of: December 31, 2026 (for any Opportunity Zone investment in 2019) or the date the QOF shares are sold.

Reduction of Capital Gains Taxes: Shareholders of QOF will also receive a 10% step‐up in the basis of the capital gains that are reinvested in an QOF, if those shares are held for 5 years, and an additional 5% step‐up in basis if those same shares are held for 7 years, thereby excluding up to 15% of the original capital gains from taxation.

Elimination of Capital Gains Taxes for investments in a QOF: Shareholders are exempt from federal taxation on capital gains derived from the appreciation of their investment in a QOF, if those shares are held for at least 10 years.

Possible State Income Tax Benefits under Federal Opportunity Zone Program: Dependent on the State where the stockholder lives and if that State conforms with Federal Opportunity Zone regulations, that investor may be entitled to receive the same Federal Opportunity Zone capital gains tax benefits (deferral, reduction, and elimination of capital gains taxes) on a State income tax level. Wisconsin conforms with the Federal Regulations.

Example: You sell stocks or real estate for $300,000. Your cost basis is $100,000 so you have capital gains of $200,000 that will be taxable, assuming a 15% capital gains tax rate, you would owe $30,000 in taxes. Or you can take just the $200,000 gain (or part of it) and invest it in a QOF. If you hold that fund for 5 years, your capital gains tax will be reduced by 10%, if you hold it for 7 years, it will be reduced by an additional 5% totaling 15% reduction in taxes owed or in this example $4,500. Now, let’s say the fund grew to $400,000 in ten years, at the ten-year mark there is no capital gains on those $200,000 gains.

If you are considering using a QOF to reduce capital gains, it is important to note that not all QOF are created equal. It is important to know what the fees and commissions will be, what liquidity options you will have available, and the diversity and management of the underlining investments.