We’re off to see the Wizard of O[pportunity]Z[ones]

Photo by Annette Schuman on Unsplash

If you love paying taxes, you won’t want to read this post. On the other hand if you’re staring down the barrel of looming capital gains, whether from the sale of real estate, stocks, bonds, or interest in a partnership, this could be the opportunity that you’ve been searching.

The Tax Cuts and Jobs Act of 2017 created an excellent tax advantage for real estate investors. To encourage the improvement of economically-disadvantaged areas, the federal and state governments have designated certain census tracts as Opportunity Zones (OZ). Investing your capital gain into an Opportunity Zone will allow you to defer payment of the tax and potentially reduce the amount owed.

How does it work?

  • You sell a capital asset at a profit and receive what’s called ‘capital gains’. Capital assets include real estate, stocks, bonds, and ownership interest in a partnership.

Here’s an oversimplified example: you bought a property for $100,000 and sold it for $220,000. Normally, you’d pay capital gains tax on $120,000: the difference between selling and purchase prices.

If instead, you invest the capital gains of $120k into a QOF, after 5 years 10% of the $120k is excluded so you’d only owe tax on $108k and after 7 years, you’d only owe tax on $102,000.

  • Your capital gains tax — now potentially reduced by 15% — is deferred until December 31, 2026, assuming you don’t sell. If you liquidate the assets of the QOF before 12/31/2026, taxes would be due as of the sale date.

To be clear, you potentially save money in two ways with OZ: you save up to 15% of the capital gains tax on the asset that you sold to get into the fund and you save the tax you would have paid on the profit when you sell the building that you buy and improve with the QOF.

What are Opportunity Zones and where can I find them?**

  • These maps will help you find OZ in your area: US Mass

More info and resources from IRS.gov

  • You don’t need to live in an OZ to benefit from investing there

Compared to a doing a 1031 Exchange with your capital gain:

  • Pro: unlike a 1031 exchange, you don’t need to decide before selling your asset. As long as you invest within 180 days, you’re good. If you’ve filed taxes in between, you’ll have to do an amended return.

When evaluating a QOF or potential OZ investment, look for scenarios where the numbers work even without the tax advantages. Don’t let enthusiasm about the potential savings blind you to the economics. Consider the future growth potential of the area and its economic prospects. Factor in zoning and infrastructure as well as any local government plans to improve service offerings and community engagement. Also remember that this is a long-term investment. If there’s a chance you’ll need this money in less than 5 years, this may not make sense for you.

On the other hand, if you need a place to park some money until your retirement or if you have funds slated for long-term investing, a QOF could be a great option. Turns out the yellow brick road is made of gold bars, follow it to OZ.

*According to UrbanCatalyst.com, gains taxed as ordinary income and gains from certain derivative contracts are not eligible for qualifying investment.
**Some information compiled from Realtor Magazine, March/April 2019 issue

#opportunityzones #taxsavings #bostonreguru #realestateinvestor #EYIMbook #QOF

Real estate agent & investor, author & speaker, podcaster and arts patron. Check out GetYourFILLPodcast.com.

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