In December 2017, Congress passed the Tax Cuts and Jobs Act, and a new section of the Tax Code was formed resulting in the creation of Opportunity Zones – a national tax incentive for real estate investors.
An Opportunity Zone is a community area that has been designated by the state and certified by the IRS. Roughly 8,700 areas in all 50 states have been designated. The idea behind Opportunity Zones is to stimulate economic activity in certain selected areas across the country. To generate this economic activity, the Tax Code also defined how to create Opportunity Funds to invest in Opportunity Zones.
What are the tax benefits of an Opportunity Zone?
It’s all about the capital gains and the ability to defer, reduce and avoid them.
Defer: When you sell stock shares or real estate, you have a 180-days from the day you sell to invest in the Opportunity Zone Fund. Once you do, your capital gains are deferred to December 31, 2026.
Reduce: After holding your investment in the Opportunity Zone Fund until 2026, your capital gains taxes owed on the original capital gains event are reduced by 10%. If the investment is held for more than seven years, then it is reduced by 15%.
Avoid: If you hold your investment in the Opportunity Zone for 10 or more years, you won’t owe any federal taxes earned on your investment in the fund upon exit.
For example:
- Invest $1 million into an Opportunity Zone Fund
- Income potential property ownership free of day-to-day landlord and management issues
- After the fifth year your basis is reduced by 10% to $900,000
- After the seventh year your basis is reduced another 5% to $850,000, so now you only owe capital gains on $850,000 not $1 million; capital gains are required to be paid in year 2026.
Investment grows from $1 million to $3 million, and you owe no taxes on the $2 million gain from the Opportunity Zone Fund investment if you hold the investment for 10 or more years.
Where are Opportunity Zones located?
Opportunity Zones are found in every state. In fact, there are 8,762 Opportunity Zones spread across the country and overseas including the U.S. Virgin Islands, Puerto Rico, Northern Mariana Islands and American Samoa, with the most found in California.
Opportunity Zones typically represent low-income communities. In 2018, governors nominated areas they believed would benefit from such an investment program. They could nominate up to 25% of eligible census tracts. Of the 42,176 census tracts eligible, 8,762 were designated.
According to a 2018 Census Data and Economic Innovation Group analysis, in the average Opportunity Zone the median household income is $33,345, the poverty rate is 31.75% and the unemployment rate is 13.41%. A total of 31.3 million people across the U.S live in areas that have been designated as Opportunity Zones. Over 75% of Zones are in metropolitan areas, and 294 Opportunity Zones contain Native American lands. These zones will likely not change as the IRS rejected efforts to expand the zones.
When do Opportunity Zones expire?
The time to act is now. While you can invest in Opportunity Zones until December 31, 2026, that is also the deadline for an investment to be made to have held it for five years as of December 31, 2026, and thus qualify for a 10% basis step-up and related deferral. If you would like more information on these investment opportunities, contact us!
Diversified Investment Strategies represents a team of experienced and trusted professionals specializing in real estate investment and services – including buying, selling, leasing, retirement planning and wealth growth and management through strategic, informed investment choices and a meticulous real estate investment analysis. As knowledgeable replacement property professionals, they help clients build a customized strategy that identifies suitable investments pursuing successful completion of a 1031 Tax-Deferred Exchange. Visit them at www.diversified1031.com or call 866-261-0104.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Certain QOZ areas may not be able to appreciate as predictably as more established areas. Some neighborhoods may be more accommodating to development than others, impacting the success of the investment. Development and redevelopment of real estate traditionally have more risk than other types of real estate strategies. The availability and cost of construction and development financing is uncertain and represents a risk inherent in the execution of a QOF strategy. The rules and regulations of the QOZ Program are complex, compliance with the QOZ Program comes with significant challenges. QOFs tend to be illiquid investments for ten or more years.
Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed.
IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your situation.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. . Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years; or have an active Series 7, Series 82, or Series 65. Individuals holding a Series 66 do not fall under this definition) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.
Diversified 1031 does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified 1031 is independent of CIS.