Everybody is talking about “Qualified Opportunity Zones” right now! There is considerable tax benefits and major profit potential for real estate investors looking to take advantage of the capital gains tax credits that came along with the Tax Cuts and Jobs Act of 2017. The Opportunity Zones tax bill introduced incentives to invest in the development of designated low-income areas throughout the country. The tax benefits are substantial, to be sure. But unsurprisingly, the ins and outs of this legislation are a bit difficult to digest.
Qualified Opportunity Zones – FAQ
Q: What are Qualified Opportunity Zones?
A: Qualified Opportunity Zones (QOZ) are designated areas that provide tax advantages for real estate investors.
Q: Who came up with this tax advantage?
A: Believe it or not, Sean Parker—the founder of Napster and former president of Facebook—is responsible. The tech billionaire was seeking a solution to investor cash sitting on the sidelines, cash that he believed could otherwise be invested in underdeveloped areas. He worked with senators to introduce and pass the legislation in the Tax Cut and Jobs Act of 2017.
Q: When are these tax benefits available?
A: They become available when an investment is sold, and the gain realized is invested in a QOZ. Unlike a 1031 Exchange, the investment is not limited to a real estate for real estate exchange. The gains could be from the sale of a business, stocks, bonds, or any investment with taxable gains.
It should also be noted, there is no requirement to reinvest the entire proceeds of the sale. You could potentially pocket cash and still defer all the gains by reinvesting only the gain portion of the proceeds.
Even better, depending on the amount of time you stay invested in the QOZ, the tax on the deferred gain could be reduced by up to 15 percent, and the new investment could be entirely tax-free at disposition! Plus, you have 180 days from the time of your investment sale to reinvest in a QOZ, giving you time to make that decision.
Q: Why should a QOZ interest me?
A: A QOZ allows you or your investors to exit a current investment with gains and defer capital gains taxes, resulting in potentially massive savings. If you own land or property in a QOZ, it may be worth more than you think.
Q: How do I take advantage?
A: Benefiting from a QOZ is easier than you might think. Simply sell an investment that has appreciated in value, and invest the gain in value into a QOZ.
Q: Where do I find Qualified Opportunity Zones?
The U.S. Department of Treasury, supported by the Community Development Financial Institutions Fund (CDFI Fund), has published both a list of Qualified Opportunity Zones and a map of all designated QOZs online.
Q: Where is the best place to find more information about Qualified Opportunity Zones?
The IRS has published an Opportunity Zones frequently asked questions on its website.
Q: How do Opportunity Zones work?
Here’s an example of how to take advantage of these economic opportunity zones and beat “the taxman.”
Bill is a very successfully stock trader. He has made a fortune investing in all of the hottest tech stocks while continuing to work to operate his business. Finally he decides it is time to sell stock and realize some profits which he does ends up with over $1,000,000 in taxable capital gains.
I hate to disappoint you, but Bill’s $1,000,000 return on the sale of his tech stocks means he has to send a check for $260,000 to the government to pay his capital gains taxes.
The joyful feelings Bill had about the extraordinary gains in stock trading turns to dread when he realize how much of his profit is going to be lost to taxes. This is where Qualified Opportunity Zones come into the picture.
Bill calls a real estate investment buddy named Larry. Larry finds Bill a qualified opportunity. Bill buys the real estate.
Below are Bill’s options and the corresponding tax consequences, depending on how long he holds the investment:
If Bill holds the investment for five years, he would defer the capital gain of $260,000 until the asset is sold. Bill would then get a 10% discount on his gain for investing in a QOZ. This leaves Bill owing $234,000 instead of $260,000, and he is able to defer the gain for five years.
If he holds for seven years, the discount on his gain would be 15%. He would only owe $221,000.
And, most impressively, if Bill holds the investment for 10 years in a QOZ, he would pay ZERO tax on any gains on appreciation from real estate investments in the QOZ.
But wait there’s more…
The real estate investment that Bill participated in pays investors an 8% annual distribution. What this means is Bill receives quarterly checks for $2,000 and the best part is he pays ZERO tax on these distributions.
Let’s say it plays out like this. Bill invested $1,000,000 into a Qualified Opportunity Zone. He holds it for 10 years, and sells it for $2,000,000.
Bill defers tax on the original investment until the time of sale and receives up to a 15% discount at that time. Plus, now he owes ZERO capital gains on the qualified investment portion of the sale, saving him $299,000 in capital gains taxes. In addition has generated an additional $80,000 in tax free passive income during this period.
Qualified Opportunity Zone investments are pretty AWESOME right?
If you have more questions on Qualified Opportunity Zones, feel free to schedule a chat on my Calendy or shoot me an email at info@freemanequity.com
