WHAT ARE OPPORTUNITY ZONES?

Part of the tax overhaul bill passed by Congress in 2017 includes a new community development program to encourage investments in lower-income communities. Each state, including Connecticut, was able to select certain areas as “Opportunity Zones.”  Connecticut designated 72 areas as Opportunity Zones.  The Opportunity Zones in our area include certain census tracts in New Haven, Hamden, Ansonia and West Haven.

The intent of the new Opportunity Zones is to increase outside investment into these lower income areas by providing targeted tax benefits.  The tax benefits to investing in the Opportunity Zones can be substantial, including deferral of capital gains and a reduction in the capital gains tax that would otherwise be due.  The mechanism for making the investment in the Opportunity Zone is through an Opportunity Fund.  The Opportunity Fund is formed in the private sector.  The Opportunity Fund may be composed of one or multiple investors, or may be part of an investment pool run by an institutional investor.  The benefit to the investor is that the investor is able to roll a prior capital gain over into the investment in the Opportunity Fund and not have to immediately recognize (pay tax) on their prior capital gain.  Then, so long as the funds remain invested in the Opportunity Zone, the gain is deferred until the end of 2026.   In addition, if the funds remain in the Opportunity Zone for five years, the gain is reduced by 10%, and if the funds remain for seven years the gain is reduced by 15%.

Since the Opportunity Zone concept is so new, it is too early to tell if they will result in substantial investment in the targeted areas.  However, they appear to provide a good opportunity for investors to shelter existing capital gains for a period of time, and even reduce the amount they need to pay capital gains taxes on if the investments are held for five years or more.

Additional information on Opportunity Zones can be found here https://www.cerc.com/blog/connecticuts-opportunity-zones/

https://www.routefifty.com/finance/2018/10/opportunity-zones-regulations-treasury-irs/152107/

*Photo Courtesy of the State

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