Have you ever feared capital gains obligations? This fear plagues many business owners and investors as they consider selling a property and often keeps them from ever investing in a property in the first place. The IRS listened and established something called “Opportunity Zones” under the Tax Cuts and Jobs Act of 2017.
Opportunity zones allow for a deferral and permanent elimination of capital gains taxes when the gain is invested in an identified zone using opportunity funds. This not only helps the individual investing in or selling a property, it also promotes areas of the country for investment. The first set of opportunity zones cover parts of 18 states, including Wyoming. So how do they identify zones? The zones are in certain low income community (LIC) census tracts. Areas eligible must have a median family income not greater than 80% of area median and 20% or greater individual poverty rate. In Wyoming this provides a number of commercial and industrial areas for investment.
Let’s look at an example of how this could work: If you owned an investment property or a business and you sold it for a profit then there is a portion of those proceeds that would likely be eligible for capital gains tax. This program provides you with the option of taking the capital gains portion of your sale and putting it in an Opportunity Fund that can be used to reinvest in the identified areas. The Opportunity Fund is an investment vehicle organized as a corporation or partnership that specializes in aggregating private investments and deploying capital in Opportunity Zones. The taxes are then deferred from the sale of any asset if reinvested within 180 days. An investment today (in 2018) would be deferred until the sale of new investment, or December 31, 2026, whichever is earlier. Any investment re-invested and held for 5 years gets a tax basis increase of 10%, and any investment held for 7 years gets a tax basis increase of 15%- thereby reducing the original capital gains by that amount. Permanent elimination of capital gains is achieved when the investment is held for 10 years. The permanent exclusion only applies to the gains accrued in an Opportunity Fund.
While the proposed Wyoming Opportunity Zones have not been finalized yet, we strongly encourage you to consult your tax professional or financial advisor. Additionally, you can find out more checking out the IRS FAQ webpage for the program here. We will also continue to track the progress of the proposed zones to keep you informed.
Justin Farley is the Regional Director for Natrona, Converse, Niobrara and Platte counties. Justin has a bachelor’s degree in Financial Management from the University of Montana. He has experience as a licensed financial advisor and Wyoming realtor. Additionally, Justin has owned, operated and sold a Papa Murphy’s and Quiznos franchise. Justin enjoys sharing his business experience with others in hopes of smoothing out the sometimes difficult path of self-employment.
When he’s not in the office: Justin will be running kids around to different sporting events and looking for an opportunity to fish.