by Barrent Dahl
There is an exciting tax-saving opportunity for those investing in designated zones across the country, including within our own metro area. These zones are designed to encourage economic development and create jobs in areas with significant untapped economic potential.
In accordance with H.R.1 Tax Cut and Jobs Act of 2017, Governor Dayton nominated 128 census tracts for designation as a qualified opportunity zone. On May 18, 2018, the U.S. Department of Treasury certified and formally designated these census tracts as qualified Opportunity Zones. See more information on Minnesota opportunity zones at https://mn.gov/deed/business/financing-business/tax-credits/opp-zones/
If you’ve sold a piece of property or an investment for a significant gain, you can defer the gain if you invest in a Qualified Opportunity Fund in a Qualified Opportunity Zone within 180 days of triggering the gain. This will allow you to defer paying tax on the sale until December 31, 2026 (2027 tax filing season). Two main factors: you have to a) sell something for a gain, and b) you have to want to invest in something else.
For example, two business owners who are 50/50 shareholders sell their business for a $2 million gain. One of the shareholders wants to retire but the other wants to purchase a building in St. Paul.
Shareholder One takes the money and pays tax on their share of $1 million gain at a 33.8% tax rate. They will pay $338K in tax and retire with $662k of cash in their pocket.
Shareholder Two takes the money from the sale and invests in a new building purchased in St. Paul for $1 million. No tax is paid on the initial sale of the investment, and basis in the new property is $0. If the property is held for 5 years, the basis is stepped up by 10% of the deferred gain. If the property is held for 7 years, there is an additional 5% basis increase. At 12/31/2026, the tax deferral period is complete and tax will be due. If they still own the property, tax will be $287,300 ($1 million original deferred gain – $150k additional basis * 33.8% tax rate). If they sell the property in year 10 for $1.5 million, no additional tax is due and they walk away with $1.5 million cash in their pocket.
In the above example you would enjoy all of the following:
If you keep your money in an opportunity zone for a minimum of 10 years there is a tremendous opportunity for you.
If you’d like to learn more about this opportunity you can reach out to Jared Weiskopf, Director and State and Local Tax Service Area Leader at Redpath and Company.
Barrent Dahl is a Business Tax Manager specializing in Business Tax and Business Succession Planning. He’s been a part of the Redpath and Company team since 2011.More posts by Barrent Dahl