Disclaimers
General Disclaimer
As of July 2, 2018, there is uncertainty regarding the Opportunity Zone program, as the US Department of the Treasury has not released guidance on many of the questions left open by the Tax Cuts and Jobs Act of 2017. These open questions include, but are not limited to: (a) what kinds of gains, other than capital gains, if any, can be properly rolled into an Opportunity Fund, (b) how much time an opportunity fund will have to deploy the capital it has raised, (c) tax treatment of gains in an opportunity fund pass-through partnership, etc. Accordingly, the foregoing discussion of the various aspects of the Opportunity Zone program is based upon positions that we believe to be reasonable given the statute as currently written and prior Treasury and IRS precedent; however, there can be no assurance that the forgoing discussion will ultimately prove to be correct as Treasury begins issuing guidance and regulations on the Opportunity Zone program. Given such uncertainty, each prospective investor should consult with their personal tax advisors before making any investment into an opportunity fund, including the Charleston O Fund.
Overview
The Tax Cuts and Jobs Act (TCJA) provides that, for investors who have rolled capital gains into an opportunity fund and hold that investment in the opportunity fund for a period of ten years or more, that any additional gain realized by such investor from liquidating such investment will not incur additional federal capital gains taxes. However, please note that, given the uncertainty regarding future Treasury Department guidance, each prospective investor should consult with their personal tax advisors before making any investment into an opportunity fund, including the Charleston O Fund.
Defer Capital Gains
Section 1400Z-2(b)(1) states that capital gains rolled into an opportunity fund within 180 days of being realized shall be included in taxable income for the year ended December 31, 2026.
Reduce Tax You Owe
Section 1400Z-2(b)(2)(B) states that an investor’s basis in the capital gain rolled into an opportunity fund will have a step-up in basis of 10% if held for at least five years, and a step-up in basis of an additional 5% if held for at least seven years. Note, however, that as the deferred capital gain will be taxed on December 31, 2026, we expect that these holding periods would need to be satisfied prior to that date in order to receive the benefits described herein.
Disclaimer on Illustrative Scenario on Potential After Tax Returns
The TCJA provides that, for investors who have rolled capital gains into an opportunity fund and hold that investment in the opportunity fund for a period of ten years or more, that any additional gain realized by such investor from liquidating such investment will not incur additional federal capital gains tax. However, please note that, given the uncertainty regarding future Treasury Department guidance, prospective investors should consult with their tax advisor before making any investment into an opportunity fund, including the Charleston O Fund.
*The calculations show an investor’s potential after-tax returns under different scenarios, assuming an investment of capital gains prior to December 31, 2019, a 10 year holding, annual investment appreciation of 7%, and a long-term capital gains tax rate of 23.8% (federal capital gains tax of 20% and net investment income tax of 3.8%), only taking into account tax at a federal level (not state). Note, however, that the performance assumptions shown are for illustrative purposes only, and are not intended to reflect the actual experience of any individual investor. The calculations for the standard stock portfolio are based on rolling over capital gains equal to $100,000, at an initial tax of 23.8% (using the same assumptions described above), into a standard stock portfolio, the remaining $76,200 of which then appreciates at a com- pounding return of 7%. At the end of each holding period, the investment in the standard stock portfolio is assumed to be sold and long- term capital gains at a tax rate of 23.8% paid on the capital gains from the investment in the standard stock portfolio. The ten-year hold calculations for the Opportunity Fund are based on rolling over gains of $100,000, at an initially deferred tax of 0%, into an Opportunity Fund, with the entirety of the $100,000 then appreciating at a compounding return of 7%, until December 31, 2026, at which time the initially deferred tax is reduced by 15% and the net amount is taxed at a rate of 23.8%, effectively reducing the principal invested in the opportunity fund accordingly. Thereafter, returns continue to compound at the same initial rate selected by the user of 7%. At the end of the tenth year of the holding period, the investment in the Opportunity Fund is sold and the capital gains on the investment in the Opportunity Fund itself is taxed at a rate of 0%.