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New Investment Opportunity through the Tax Cuts and Jobs Act for Attorneys

Do you have a large capitol gain and want the ability to defer your taxes and grow your investment? If so, the Opportunity Zone Tax Initiative is something you should consider.

The Tax Cuts and Jobs Act created a new avenue for community investment with the Opportunity Zone Tax Initiative. The initiative aims to spark economic recovery in targeted areas of the country. Investors with unrealized capital gains can defer payment of gains, reduce what they owe, and pay zero tax realized by investing in communities targeted for revitalization.

Through the program investors can reinvest unrealized capital gains into Opportunity Funds, an investment vehicle set up as a partnership or corporation for investing in eligible businesses, real estate, or business assets.

How it Works

The Opportunity Zones program offers three tax benefits for investing in low-income communities through a qualified Opportunity Fund:

  1. temporary deferral for capital gains reinvested in an Opportunity Fund.
  2. An increase in basis for capital gains reinvested in an Opportunity Fund. The basis increase is based on the number of years the investment is held, excluding up to 15% of the gain if the investment is held for at least 7 years.
  3. An exclusion from capital gains tax from the sale of an investment in an Opportunity Fund, if the investment is held for at least 10 years.

What are Opportunity Zones?

Opportunity zones were designated based on census tracts. IRS guidelines defined a low-income community as one below 80% of the median income or having a higher than 20% poverty rate. The zones were nominated by governors and certified by the U.S. Department of Treasury.

According to the Economic Innovation Group (EIG), 52.3 million Americans live in economically distressed communities, or areas struggling to bring in capital and new investors. EIG also found that the country is dependent upon only a handful of areas for its growth, and most metro areas are seeing businesses close rather than open each year.

Qualified Opportunity Zone investment properties include newly issued stock, partnership interests, and business property in a qualified Opportunity Zone business.

What are Opportunity Funds?

Opportunity funds are a private sector investment fund that puts at least 90% of its capital into Opportunity Zones. The fund model allows for investors to pool resources and enjoy tax benefits, while simultaneously making an investment into under served communities.

Opportunity funds must be organized as a corporation or partnership, but the guidelines allow for a broad participation from many different types of investors. In addition, the fund can invest across multiple Opportunity Zones or just one zone.

What could an investment look like?

Situation

  • In 2018, an individual investor sells 1,000 shares of Amazon stock that they purchased in 2013 for $250,000.
  • The sale at $1,250 per share results in a $1 million capital gain.
  • Instead of paying the $238,000 in federal capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified Opportunity Fund that invests the capital in newly issued preferred stock shares of various operating businesses located in Opportunity Zones with a plan to liquidate the fund in 2028.
  • The assumed value of this investment in 2028 is $2 million.

Investor Benefits 

  • Investing $1 million instead of the $762,000 that would be remaining if the capital was not re-invested into an Opportunity Fund.
  • Paying $202,300 in taxes in 2026 instead of paying $238,000 in 2018.
  • Owing no additional tax on the $1 million in capital gains on the Opportunity Fund investment realized in 2028.

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Edward Radetich
Edward J. Radetich, Jr., CPA (Ed), oversees management and operation of the firm. Having participated in the administration of hundreds of class action matters, Ed has been instrumental in developing the policies and practices of the claims administration group over the last 35 years and has established Heffler Claims Group as a leading provider of class action services for antitrust, securities, employment and labor, consumer and government enforcement matters.


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