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What Are Opportunity Zones? | Real Estate Investing

“Qualified Opportunity Zones” are creating fairly a buzz currently. And for good cause! There’s main revenue potential for actual property buyers trying to reap the benefits of the capital positive factors tax credit that got here together with the Tax Cuts and Jobs Act of 2017.

In essence, the Opportunity Zones tax invoice launched incentives to put money into the event of designated low-income areas all through the nation. The tax advantages are substantial, to make sure. But unsurprisingly, the ins and outs of this laws are a bit troublesome to digest.

Here are the fundamentals.

A Beginners Guide to Qualified Opportunity Zones

Q: What are Qualified Opportunity Zones?

A: Qualified Opportunity Zones (QOZ) are designated areas that present tax benefits for actual property buyers.

Q: Who got here up with this tax benefit?  

A: Believe it or not, Sean Parker—the founding father of Napster and former president of Facebook—is accountable. The tech billionaire was searching for an answer to investor money sitting on the sidelines, money that he believed might in any other case be invested in underdeveloped areas. He labored with senators to introduce and move the laws within the Tax Cut and Jobs Act of 2017.

Related: Tax Reform Update: A New Way to Reduce Taxes on Rental Income

Q: When are these tax advantages obtainable?  

A: They change into obtainable when an funding is offered, and the acquire realized is invested in a QOZ. Unlike a 1031 Exchange, the funding is just not restricted to an actual property for actual property trade. The positive factors might be from the sale of a enterprise, shares, bonds, or any funding with taxable positive factors.

It also needs to be famous, there isn’t a requirement to reinvest your complete proceeds of the sale. You might doubtlessly pocket money and nonetheless defer all of the positive factors by reinvesting solely the acquire portion of the proceeds.

Even higher, relying on the period of time you keep invested within the QOZ, the tax on the deferred acquire might be decreased by as much as 15 p.c, and the brand new funding might be fully tax-free at disposition! Plus, you may have 180 days from the time of your funding sale to reinvest in a QOZ, supplying you with time to make that call.

Q: Why ought to a QOZ curiosity me?  

A: A QOZ permits you or your buyers to exit a present funding with positive factors and defer capital positive factors taxes, leading to doubtlessly huge financial savings. If you personal land or property in a QOZ, it might be value greater than you suppose.

Q: How do I take benefit?  

A: Benefiting from a QOZ is less complicated than you may suppose. Simply promote an funding that has appreciated in worth, and make investments the acquire in worth right into a QOZ.  

Related: IRS Code Section 199A: How the New 20% Pass-Through Deduction Affects Investors

Q: Where do I discover Qualified Opportunity Zones?

The U.S. Department of Treasury, supported by the Community Development Financial Institutions Fund (CDFI Fund), has revealed each an inventory of Qualified Opportunity Zones and a map of all designated QOZs on-line.

Q: Where is the perfect place to seek out extra details about Qualified Opportunity Zones?

The IRS has revealed an Opportunity Zones steadily requested questions on its web site.

home framing during home construction against cloudy sky

Q: How do Opportunity Zones work?

Here’s an instance of the right way to reap the benefits of these financial alternative zones and beat “the taxman.”

John has efficiently navigated the lengthy and winding highway of the garden upkeep enterprise. He began his firm from scratch, so his unique foundation in his enterprise was $zero. After working “eight days a week” and reaching a sure stage of success along with his firm, he sells it to Paul for $1,000,000.

Great information for John, proper?!

Now, I don’t need to spoil the occasion, however John’s $1,000,000 return on the sale of his enterprise means he has to write down a test for $260,000 to the federal government to pay his capital positive factors taxes.

The euphoria John felt about promoting his firm rapidly turns to frustration, as his tax actuality settles in. He turns to his tax accountant, George, for assist.

George tells him about Qualified Opportunity Zones.  

John calls an actual property funding buddy named Ringo. Ringo finds John a professional alternative. John buys the true property.

Below are John’s choices and the corresponding tax penalties, relying on how lengthy he holds the funding:

  • If John holds the funding for 5 years, he would defer the capital acquire of $260,000 till the asset is offered. John would then get a 10% low cost on his acquire for investing in a QOZ. This leaves John owing $234,000 as a substitute of $260,000, and he is ready to defer the acquire for 5 years.  
  • If he holds for seven years, the low cost on his acquire can be 15%. He would solely owe $221,000.
  • And, most impressively, if John holds the funding for 10 years in a QOZ, he would pay ZERO tax on any positive factors on appreciation from actual property investments within the QOZ.

Let’s say it performs out like this. John invested $1,000,000 right into a Qualified Opportunity Zone. He holds it for 10 years, and sells it for $2,000,000.

John defers tax on the unique funding till the time of sale and receives as much as a 15 p.c low cost at the moment. Plus, now he owes zero capital positive factors on the certified funding portion of the sale, saving him $299,000 in capital positive factors taxes. The cause? It’s just because he invested in a Qualified Opportunity Zone. AMAZING!

If you’re nonetheless studying this, you’re in all probability intrigued and have extra questions. While it is a fast overview of this system, I’ve additionally included some useful hyperlinks beneath. If you may have questions, be at liberty to achieve out to me immediately or remark beneath. Be certain to tune in subsequent week for “The Flash Guide to Setting up a Qualified Opportunity Zone Fund.”

Intrigued? Do you may have extra questions? 

Reach out in a remark beneath. 

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About Scott Morgan

Scott B. Morgan writes for Debt Management and Real Estate sections in AmericaRichest.

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