Real estate investors want to pay the least possible taxes on their properties. Investing through the Qualified Opportunity Zone (QOZ) program allows them to do so while ensuring they use the funds for the greater good.
These zones exist in low-income parts of the country, and the government created them to spur economic growth. In 2017, Congress passed the Tax Cuts and Jobs Act that created the program.
How Investors Benefit
When an investor puts realized capital gains in qualified opportunity zone funds, the government provides them with a tax break on their capital gains. In fact, they can eliminate any tax liability resulting from future value appreciation when they put their money into this program. This allows them to double the returns they see, making this an appealing opportunity.
How This Works
Investors look to case studies to see how the program works. Here is an excellent example of an investor who benefited from an opportunity zone fund. Ten years ago, the investor purchased a multi-family property at a great price. During the years they owned the property, its value doubled.
When the time came to sell, the market was strong and the property brought in a great price. However, the owner was facing a large tax bill thanks to capital gains.
They considered using a 1031 Exchange to put off paying the capital gains tax but worried they wouldn’t find a like-kind replacement. They knew they wanted to keep their funds in this investment vehicle but didn’t want to take an active role in managing a property. To avoid this, they moved the money to an opportunity zone fund.
The Tax Benefits
This move allowed them to reduce their realized capital gains by 10 percent in five years and an additional five percent in seven years while deferring the capital gains for up to nine years. Any future capital gains on the investment could remain in the fund for a minimum of ten years to avoid capital gains taxes completely.
Additional Benefits of This Investment Opportunity
When Congress created the opportunity zones, they wanted to make them attractive to investors. In addition to the tax benefits, they choose to offer other perks for investors who put their money into one of the funds. The investor doesn’t have to put all monies from the sale of their asset into the fund.
Congress only requires them to reinvest the capital gains. In addition, the investor can defer capital gains from the sale of other assets independent of the QOZ.
Investors find they aren’t limited when it comes to the type of capital gain used for QOZ investing. Congress didn’t put restrictions on this. In addition, syndicators may create an opportunity fund to allow for investing in a range of these zone opportunities.
Upon realizing the many benefits of this investment vehicle, the investor chose to learn more. They found that a qualified opportunity is one that an American partnership or corporation established to allow men and women to invest in qualified property in one of these zones.
Finding a Qualified Opportunity Zone
Upon the passage of the 2017 Tax Cuts and Jobs Act, the government identified approximately 8,700 Qualified Opportunity Zones in the country and its territories. The investor began researching the different zones to determine where the money should be placed. They wanted to find the right qualified opportunity fund for their needs while allowing them to diversify their investment portfolio.
Deferring and Excluding the Tax
The investor needed to determine how much should be saved by choosing this investment opportunity. The reduced deferred capital gains tax on the initial investment wouldn’t be due in full for nine years and some of the tax would be reduced if the money were left to sit for a predetermined period of time, either five or seven years. After a ten-year period, the appreciation on the initial investment would be tax-free.
The investor quickly determined they could see significant tax savings if the capital gains in the opportunity fund increased significantly in value over the ten years. They decided this was the best option in their situation.
Learn more about opportunity zone funds and whether they meet your needs. Many investors like the idea of being able to defer their capital gains taxes for years. They also enjoy knowing they won’t pay tax on any appreciation of the initial investment. Make your money go further by choosing this option. It’s a passive way to see a significant return.