Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
In my opinion, Opportunity Zones are over-hyped. For a buyer, the costs outweigh the benefits. For a seller, the most obvious benefit is the opportunity (pun intended) to market hard to sell properties in less than ideal areas as “being located in an Opportunity Zone!”. Maybe some of those properties will get more attention than they otherwise would have. That’s about it, for me.
That said, we get a lot of questions on this topic so here we go:
What’s the point?
The Opportunity Zones program was designed to motivate private investors to stimulate job creation and financial growth within designated “economically distressed” neighborhoods and districts.
Previously, the U.S. government relied on individual taxpayer dollars to revitalize struggling communities. Under the new Opportunity Zones program, the government now offers capital gains tax incentives to private investors that meet program qualifications.
In total, more than 8,700 census tracts have received Opportunity Zone Status.
But you can’t buy properties directly, you must invest in a fund?
To tap into the perceived benefits of the program, investments must be made into a Qualified Opportunity Fund (QOF). A QOF is a newly defined investment vehicle organized as a partnership or corporation for the sole purpose of Opportunity Zones Investment.
Why go through the hassle to buy these out-of-favor properties?
Temporary Deferral Of Taxable Income
The IRS allows for a temporary delay of inclusion of taxable income for any capital gains that are reinvested into a Qualifying Opportunity Fund within 180 days. The temporary deferral protects the capital gains from being taxed until December 31, 2026, or when the investment is sold, whichever comes first.
Translation: If you just sold a property that had a capital gain…you can delay paying those taxes if you roll the proceeds from your sale into an Opportunity Fund.
Basis Increase For Capital Gains
Additionally, the Opportunity Zones Program also offers a basis increase for any capital gains reinvested in a Qualifying Opportunity Fund. The step-up in basis is 10% for an Opportunity Fund held by the taxpayer for at least five years. The basis increases an additional 5% if the Opportunity Fund is maintained for at least seven years, resulting in a total possible exclusion of up to 15% of the original gain from being taxed.
Translation: If you just sold a property that had a capital gain…you can delay paying those taxes if you roll the proceeds from your sale into an Opportunity Fund..after 5 years, you’ll erase 10% of those taxes due…after 7 years you’ll erase 15% total.
Permanent Deferral Of Taxable Income
Finally, the IRS allows for a permanent tax exclusion on capital gains accrued from the sale or exchange of an Opportunity Fund investment as long as the investment is held for a period lasting at least ten years. The permanent exclusion only applies to gains amassed following an investment in a QOF.
Translation: If you leave your money in the Opportunity Fund for 10 years…and the fund makes you money…you won’t pay capital gains taxes on that money. BUT you’ll still have to pay taxes on your original sale proceeds…and if I was a betting man…I would bet that that first capital gain will be a heck of a lot larger than any gain you’ll earn within the fund.
Does anyone care?
It’s too early to tell but Wall Street has certainly taken notice. They’ll be happy to sell you on one of these funds very soon.
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About Beau Beach, CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@ProwessIRES.com