According to the IRS, over 8,700 Opportunity Zones in all 50 states were added to the US tax code as an economic development tool, designed to spur economic growth and job creation in those communities nominated by state governors and certified by the Secretary of the U.S. Treasury.
There are two certified Opportunity Zones on Kauai, three on Maui, six on the Big Island and 13 in Honolulu. On Kauai, one Opportunity Zone is located on the island’s South Shore and includes Kukui’ula property. The second Opportunity Zone is located on the island’s North Shore and includes property in Hanalei.
Incentives for Economic Development
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, added the Opportunity Zones to the tax code, as well as 26 USC section 1400Z-2 to provide certain benefits for taxpayers investing in Opportunity Zone property.
The Opportunity Zones program is designed to spur economic development by providing three tax incentives to taxpayers:
- First, a taxpayer may defer paying tax on any prior gains invested in a Qualified Opportunity Fund until the earlier of 1) the date the investment is sold or exchanged, or 2) December 31, 2026.
- Second, if the Opportunity Fund investment is held longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the exclusion is 15%.
- Third, if the taxpayer holds the investment in the Opportunity Fund for at least 10 years, the taxpayer is eligible for an increase in basis of the Opportunity Fund investment equal to its fair market value on the date that Opportunity Fund investment is sold or exchanged.
Kukui’ula Kauai property is included in one of 8,700 Opportunity Zones certified by the U.S. Treasury
All incentives are related to capital gains, and all are tied to the length of time an investment is held in an Opportunity Fund. A taxpayer may defer capital gains tax by investing capital gain(s) in an Opportunity Fund within 180 days from the date of the sale or exchange of stock or property.
It will be interesting to follow the IRS publications as the department interprets section 1400Z-2 applications developed by tax specialists. Please contact your tax specialist to determine how these new tax incentives may possibly work for you.