{"id":107113,"date":"2019-02-12T14:30:50","date_gmt":"2019-02-12T21:30:50","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=107113"},"modified":"2021-03-16T14:52:15","modified_gmt":"2021-03-16T20:52:15","slug":"opportunity-zones-tax-savings","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/opportunity-zones-tax-savings","title":{"rendered":"Investing in Opportunity (Zones): A Tax-Saving Strategy"},"content":{"rendered":"

Within the hundreds of pages of the latest tax reform legislation, one of the least publicized\u2014yet most powerful\u2014tax benefits that came out was the Opportunity Zones program<\/a>. <\/span><\/p>\n

This government program offers three powerful tax advantages to real estate investors<\/a>:<\/span><\/p>\n

    \n
  1. The ability to defer capital gains<\/a> taxes on the sale of real estate<\/span><\/li>\n
  2. The ability to permanently eliminate part of the capital gains taxes<\/span><\/li>\n
  3. The potential ability to receive permanent tax-free gain on 10-years of forced appreciation<\/span><\/li>\n<\/ol>\n

    The Purpose of Opportunity Zones<\/h2>\n

    The Opportunity Zones (also called O-Zone) program was enacted to help improve certain distressed communities. The government\u2019s goal was to provide tax incentives to bring in private investments in housing and other sections to revitalize these areas. Areas designated as Opportunity Zones can be found throughout all 50 states.<\/span><\/p>\n

    What Are the Tax Benefits of Investing in Opportunity Zones?<\/h3>\n

    1) The ability to defer capital gains taxes on the sale of real estate.<\/strong> <\/span><\/p>\n

    Let\u2019s look at an example. Jim, a resident of Florida, bought a rental for $100K at the end of 2016. In 2018, he sold it for $250K. <\/span>For simplicity purposes, let\u2019s assume $0 depreciation was taken. <\/span><\/p>\n

    Instead of paying capital gains taxes on his $150K gain, he invests the $150K into an Opportunity Zone Fund within 180 days of the sale. He calls it\u00a0Ozone Fund, LLC. <\/span><\/p>\n

    This strategy will help him to defer capital gains taxes of $22,500 in 2018 (assuming a 15 percent capital gains rate).<\/span><\/p>\n

    2) The ability to permanently eliminate part of the capital gains taxes.<\/strong> <\/span><\/p>\n

    This means that not only will Jim defer the tax by not paying it in 2018, but he will also eliminate a portion of the taxes so that he never has to pay it in the future either.<\/span><\/p>\n

    Ozone Fund, LLC uses Jim\u2019s $150K investment to purchase a duplex in Florida. Jim puts in an additional $100K to improve the building and turn it into a great cash-flowing property.<\/p>\n

    After holding the duplex via Ozone Fund, LLC for\u00a0five\u00a0years, Jim\u2019s original capital gains of $150K will reduce by\u00a010 percent\u00a0(down to $135K), and he will have permanently eliminated $2,250 in taxes.<\/p>\n

    ($150,000-$135,000) X 15% capital gains rate<\/p><\/blockquote>\n

    In the future, Jim will only need to pay capital gains tax on $135K instead of the original $150K gain.<\/p>\n

    If Jim continues to hold the investment for at least another\u00a0two\u00a0years (a total of seven or more years), then his original capital gains of $150K will reduce by\u00a015 percent\u2014as opposed to 10 percent after five years (down to $127,500). Jim will have permanently avoided paying $3,375 in taxes.<\/p>\n

    ($150,000-$127,500) X 15%\u00a0capital gains rate<\/p><\/blockquote>\n

    In the future, Jim would only need to pay capital gains tax on $127,500 instead of the original $150K.<\/p>\n

    3) The ability to receive permanent tax-free gain on appreciation. <\/strong><\/p>\n

    Jim decides to continue holding onto the property in Ozone Fund, LLC. After a total of 10 years of ownership, Jim will also be able to receive permanent tax-free appreciation of the property. <\/span><\/p>\n

    Let\u2019s assume that at the end of 10 years, the duplex is now worth $550K. Here is what the benefit looks like assuming $0 depreciation:<\/span><\/p>\n

    $550,000\u00a0 \u00a0 Fair Market Value at the End of Year 10<\/strong><\/p>\n

    $127,500\u00a0 \u00a0 \u00a0Tax Basis After Gain Recognized 12\/31\/26<\/em>
    \n $100,000\u00a0 \u00a0 Improvements Made<\/em>
    \n $227,500\u00a0 \u00a0 \u00a0Total Cost Basis<\/em><\/p>\n

    $322,500\u00a0 \u00a0 \u00a0Tax-Free Gain (FMV \u2013 Cost Basis)
    \n15%\u00a0 \u00a0 \u00a0Capital Gains Tax Rate<\/span>
    \n\u00a0$48,375\u00a0 \u00a0 \u00a0Total Permanent Tax Savings
    \n<\/strong><\/p><\/blockquote>\n

    In Jim\u2019s example, he will be able to save up to $48,375 of taxes permanently!\u00a0In fact, if he chose to, he may be able to continue holding this property until 2047 to continue the tax-free growth.<\/p>\n

    \"closeup<\/p>\n

    How to Invest in Qualified Opportunity Zones<\/h2>\n

    Now that we know how powerful this new tax benefit can be, let\u2019s go over some of the rules on how to qualify.<\/span><\/p>\n

    Qualifying Opportunity Zone Properties<\/h3>\n

    Unfortunately, simply buying a property that is within one of the IRS-designated Opportunity Zones will not automatically qualify you for these wonderful tax benefits. Since the goal of the program is to improve distressed communities, additional conditions must be met.\u00a0<\/span><\/p>\n

    These requirements include:<\/p>\n