April 29, 2019
Viewpoint

Opportunity awaits the Worcester investor

Alan Osmolowski

Someone once told me opportunity does not knock. It presents itself when you beat down the door. It is time we opened doors to take a high-level view on the potential of relatively newly created opportunity zones, part of the massive federal tax law overhaul from 2017. They are an economic development tool, designed to spur development and job creation in distressed communities by providing tax incentives.

An opportunity zone is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as opportunity zones if they have been nominated for that designation by the state and certified by the U.S. Treasury. The first set of opportunity zones, covering parts of 18 states, were designated in April 2018. Opportunity zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories. This includes parts of Central Massachusetts and specifically Worcester.

The way to invest in a qualified opportunity zone is via a qualified opportunity fund. A QOF is an investment vehicle set up as either a partnership or corporation for investing in eligible property. Taxpayers may want to set up their own QOF with its federal income tax return. You can get the tax benefits, even if you don't live, work or have a business in an opportunity zone. You just need to invest a recognized gain in an opportunity fund and defer the tax on that gain.

Virtually any entity or individual required to report capital gains can receive opportunity zone benefits: A deferral of the tax on the original gain; a 10% reduction of the tax on the original gain, if the investment is held for five years; an additional 5% discount if its held for seven years.; no taxable gains on the investment if held for 10 or more years.

The potential tax savings from an investment in a QOF can be significant. Let's say you had the foresight to invest $400 in Amazon back in 1997. Further, let's say that investment is now worth $1 million, giving you a gain of $999,600. You could sell the stock and pay the tax on the gain, or you could sell it and reinvest the proceeds into a QOF within 180 days of sale. If you choose to sell your stock and reinvest the proceeds in a QOF, the gain can be deferred until 2026 and is reduced by 15%. If you hold your investment in the QOF for 10 years, the gain on your Amazon stock in this example is reduced by 15% and any subsequent appreciation in the QOF is not subject to any federal tax.

In October, the U.S. Treasury Service and the Internal Revenue Service issued proposed regulations providing more detailed guidance for the new opportunity zone incentive, saying almost any capital gains qualify for deferral. As always, you should consult with your own financial advisor.

Worcester has always offered plenty of opportunities; now, smart investors can help the area strengthen its economic viability while benefiting individually.

Alan Osmolowski, of Holden, is a tax partner at the regional CPA firm blumshapiro.

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