When the Tax Cuts and Jobs Act was enacted in 2017, a piece of the legislation that promised large benefits for the real estate community was the creation of the Opportunity Zone Program. Justin Beck, CEO and President of Real Estate at Beck Partners, said the program presents an enticing opportunity for real estate investors who have done their homework.
The program’s purpose is to spur economic development in low-income urban and rural communities throughout the United States. To achieve this, it provides significant tax incentives for long-term private sector investments in these areas, which have been certified by the Secretary of the U.S. Treasury and the Internal Revenue Service (IRS). “There’s an opportunity to avoid almost 100% of capital gains tax by investing in Opportunity Zones,” Justin explained.
How Can I Benefit?
You don’t have to live or own property in a Qualified Opportunity Zone (QOZ) to receive tax benefits. Anyone with gains from the sale of stock or property can invest in an Opportunity Zone Fund and potentially receive tax benefits. A taxpayer can invest their gain into a Qualified Opportunity Fund (QOF) and defer tax on any prior capital gains until at least Dec. 31, 2026.
What’s more, if the QOF investment is held for longer than five years, there is a 10% exclusion of the deferred gain. If it is held for more than seven years, then it increases to 15%. If you hold the investment in the QOF for at least 10 years, you may be able to permanently exclude gain from the sale or exchange of an investment in a QOF, according to the IRS.
To reap these benefits, you will need to setup as either a corporation or partnership. The QOF then invests in a qualified business or property located in Opportunity Zones.
Finding Opportunity Zones
There are now designated Opportunity Zones in all 50 states, as well as the District of Columbia and five U.S. territories. Justin noted that in the state of Florida there are Opportunity Zones in every single county. That’s the case in several other states as well, which is highlighted in the map provided by Warren Averett in the download.
There are some obvious benefits to investing in Opportunity Zones, but there are a few key things to remember before diving in headfirst:
- Tax on the original deferred gain will always come due.
- Benefits are only available to qualifying investments using capital gains.
- There are related party rules associated to generating capital gains.
- Qualified Investments must be made while the entity is a QOF.
- Investors have 180-day periods in which to make investments into QOFs.
Additionally, the IRS provided clarification on the “substantially all” requirements for holding period and use of the tangible business property.
- At least 70% of the property must be used in a qualified Opportunity Zone.
- Tangible property must be qualified Opportunity Zone business property for at least 90% of the QOF’s or qualified Opportunity Zone’s business holding period.
- The partnership or corporation must be a qualified Opportunity Zone business for at least 90% of the QOF’s holding period.
Beck Can Assist
Beck Partners has experts like Justin who are well-versed in Opportunity Zones, and we work closely with accounting firms to provide you with the resources and assistance you need to navigate the confusing terrain.
“We understand Opportunity Zones and the complex nature of them,” Justin said. “At the end of the day, it comes down to knowing where the opportunity lies. In general, the zones were identified using 2010 census data, which means several of the areas have experienced significant improvement since 2010, but still qualify as opportunity zones, therein lies the opportunity.”
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