Why President Trump's favorite tax break probably isn't available to you
The presidential election is in its final weeks, and it's shaping up to be among the most contentious political battles in history. President Donald Trump and former vice president Joe Biden are appealing to their respective bases while also trying to woo undecided voters to their camps.
Tax policy is often a key issue in presidential campaigns because nearly every potential voter is affected by the tax laws. Trump's proposals for how he would implement further tax law changes beyond what the Tax Cuts and Jobs Act of 2017 did aren't full of specifics. But even these broad brushstrokes suggest what his priorities would be. Having been in the real estate business for nearly his entire life, Trump has a particularly strong connection with the TCJA's establishment of opportunity zones. That's likely to be a favored place for expansion – even though most investors won't be able to capitalize on it.
Save better, spend better:Money tips and advice delivered right to your inbox. Sign up here
What are opportunity zones?
Opportunity zones are designated areas where the federal government provides tax breaks to spur economic development and investment. People living in opportunity zones have lower incomes on average than surrounding areas, and the rate of poverty in opportunity zones is often higher. Thousands of opportunity zones are scattered across the nation.
'The taxes would not be waived':Most won't face Trump's payroll tax break but federal workers will
Historically, it's been tough to get outside investors to devote much capital to opportunity zone areas. As a result, both residential and commercial real estate markets have suffered there, and many of those who had the ability to leave did so. Those who remained faced even more dire prospects.
The 2017 tax overhaul established opportunity zones in an attempt to reverse that downward trend. By offering tax incentives, opportunity zones sought to draw investors to areas needing investment.
What tax breaks do opportunity zones offer?
There are three key tax incentives associated with investing in opportunity zones. First, investors are able to defer paying taxes on capital gains by reinvesting proceeds from the sale of investment assets into qualified opportunity funds. The deferral can last as long as 2026.
More:A killer tax break could be yours this year if you make this one move
Second, for long-term opportunity zone investments, some capital gains liability from the initially reinvested funds goes away. Specifically, after five years, 10% of the original capital gains is essentially forgiven for tax purposes. After seven years, that goes up to 15%.
Finally, opportunity zone investments have the potential to produce tax-free growth. If the opportunity fund holds the investment for 10 years, then any capital gains from the opportunity fund aren't taxed.
Can you invest in opportunity zones?
Under the terms of the tax break, anyone can invest in opportunity zones. However, as a practical matter, it's far easier for a small class of wealthy investors to find opportunity zone investments.
Securities laws limit the ability of financial companies seeking investment capital to accept money from all interested investors without jumping through regulatory hoops. In particular, because most opportunity zone investment funds don't want to go through the process of registering their offerings with the U.S. Securities and Exchange Commission, funds typically limit participation to accredited investors.
Fact check:National property tax isn't part of Joe Biden's plan
To be an accredited investor, you typically have to have a net worth of $1 million or more, excluding your primary residence. Alternatively, if you had annual income of $200,000 for the past two years and expect to earn at least that much this year, then you can be an accredited investor. For couples, joint income of $300,000 meets the test.
Obviously, that leaves out a large number of potential investors. Some managers have sought ways to open up opportunity zone investment to a wider range of investors, but the risks of running afoul of securities laws are high.
Expect opportunity zone expansion in a Trump second term
If President Trump wins reelection, he's signaled his intent to expand opportunity zones. That likely means designating more areas as eligible for the tax break, rather than focusing on trying to open up investment opportunities to more investors.
Unfortunately, that means that many regular investors won't get any added tax benefit from the opportunity zone provisions. For those accredited investors who do qualify, however, incorporating opportunity zones into your tax planning could offer huge benefits to reduce your tax bill.
The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
Offer from the Motley Fool:10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right – they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/1/20