Anyone who invests in real estate throws around the term “Opportunity Zone”, but what does this really mean? To most, it is a blanket term used to describe regions in which you can purchase property for a potential tax break. Look below the surface, and you’ll find the capitalist version of wealth redistribution where the government works to encourage rich investors to put their money where they want it to be.
Taking advantage of these opportunity zones is something that can be incredibly beneficial for investors from a tax perspective. Primarily, investors can defer the tax from whatever capital gains result from your investment by reinvesting them in a qualified fund. This break isn’t indefinite, but it is at least for the next seven years.
Further, if you hold your investment for at least 5 years, you earn a 10% discount on the capital gains you would have paid on the original purchase. Wait another 2 years on top of that, and this discount rate bumps up to 15%. It doesn’t stop there — if you hold your investment for a decade, the entire gain from your investment is tax free. Ultimately, the longer you wait to pay taxes, the less you have to pay.
Another convenience factor that comes along with these opportunity zones is that it is self-certified. This means that whoever is putting together the fund simply has to check the box on their tax returns to validate that they qualify for opportunity zone exemption.
With any benefit must come drawbacks, and opportunity zones are no exception. The first thing to consider when looking into investing in one of these regions is the rush for time. In order to fully gain the benefits, investors must complete their transactions before the end of 2019. If that deadline is missed, they would only qualify for the 10% discount by 2026.
There is also a “substantial improvement” requirement associated with opportunity zone investing. If a buyer purchases a property, the government wants you to improve it by funneling the same amount of money that you paid into renovations. However, this does not apply to the land itself, only the construction upon it. If you purchase a property that has been vacant for the last 5 years, however, this requirement does not apply.
Before looking into opportunity zones, remember that this is a process that cannot be done alone. It is important that you work with Realtors, CPAs & other competent professionals to navigate the great opportunity but changing landscape.. At the end of the day, these zones are mostly a tax matter, so make sure to speak with a tax expert before putting down any cash.