A new type of investment option is available, called Opportunity Zones, which offer tax benefits similar to a 1031 exchange, but with different conditions. Our team at Diversified Investment Strategies is here to fill you in!
Congress established Opportunity Zones in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments, especially in low-income urban and rural areas. Here are some of the main benefits of Opportunity Zones:
1. Investments in an Opportunity Fund may defer capital gains taxes until the sale of the investment, or until December 31, 2026.
2. When the deferral period expires, the Opportunity Fund investment may reduce capital gains taxes by 10 percent if it was held for five or more years. If it was held for more than seven years, it is available for a 15 percent reduction of taxes.
3. When you exit the Opportunity Fund, if it was held for 10 years or more, you are permanently exempt from paying capital gains taxes from the sale of the investment.
When you sell your investment with a 1031 exchange, you may also defer capital gains taxes. Here are some of the major differences between 1031 Exchange and Opportunity Zones:
Like-kind property – Required for 1031 exchange, not required for Opportunity Zone.
Time required to find replacement property – Replacement property must be identified within 45 days for 1031 exchanges. There is no requirement for an Opportunity Zone.
Amount invested – Principal and capital gains from the sale for 1031 exchange, capital gains or partial capital gains from any qualified investment sale for an Opportunity Zone.
Partnership interests, stocks or personal property – Not allowed with 1031 exchange, allowed with Opportunity Zone.
Deferral of capital gains – Available for 1031 exchange upon sale, unless further deferred in another like-kind exchange; Available for an Opportunity Zone December 31, 2026, or upon sale of property.
As you can see, there are many advantages of Opportunity Zone investments! The qualifications and regulations for these new types of investments are still being clarified.
There are holding period requirements with Opportunity Zones, such as at least 70 percent of the property must be used in a QOZ, tangible property must be qualified opportunity zone business property for at least 90 percent of the holding period, and the entity must be a qualified opportunity zone business for at least 90 percent of the holding period.
A business can also qualify using the 50% rule – If 50 percent of its employees’ hours or wages are in the zone, or if property and managers needed to produce 50 percent of the revenue of the business are in the zone, or at least 50 percent of the revenue is generated in the zone.
For more information and clarification on Opportunity Zones, to find out if your investment property is legible, or to find an Opportunity Zone investment, contact our team at DIS! This is a fantastic new option for investors wanting to defer or avoid capital gains taxes on their investments!