OPPORTUNITY ZONE TAX HACK - FLIPPING

14 Replies

I'm almost done with my FIRST FLIP in Sarasota, FL (and projected to make $20k net profit!), and was just presented with a great BRRRR deal in an opportunity zone in Bradenton, which got me to looking further into the opportunity zones we've all heard about. My understand is that I can roll any capital gains, from stocks, REI, etc into an opportunity zone and not pay any capital gains on that flip profit, when holding for at least 10 years, and then also not paying capital gains taxes to sell after that 10 years. Am I understanding this properly?!

@Andrew DeWeerd . Congratulations. My family have completed a few live-in flips but I just finished my first non occupied flip in Ellenton (closed yesterday!!). Would love to her more about “opportunity zones”.

@Kurt Traynor if @Andrew DeWeerd wasn’t always so busy he’d come meet us at the monthly meetup 🤩🥺😂

For OZ yes but you have to make sure you dot your Is and cross your t’s. There is full list online explaining all the lists you have to check off. I believe there is a specific amount of renovation you may have to do. It could be like 40% of the purchase price or house size of Reno to be eligible  after a 10 year hold. I am not clear and just gave a random example so of course do your own dd. Also I would advise you to speak with a cpa who is well versed in OZ and since it is newer you may have a difficult time finding one who has investors who already are in those qualified zones. So I might have a few contacts I can collect if you would like. 
I’m into multifamily brrrs in Bradenton and my area does have OZ in it so I’d be interested in hearing and feedback you also receive. 
Good Luck!

Originally posted by @Kayla Pronesti :

@Kurt Traynor if @Andrew DeWeerd wasn’t always so busy he’d come meet us at the monthly meetup 🤩🥺😂

For OZ yes but you have to make sure you dot your Is and cross your t’s. There is full list online explaining all the lists you have to check off. I believe there is a specific amount of renovation you may have to do. It could be like 40% of the purchase price or house size of Reno to be eligible  after a 10 year hold. I am not clear and just gave a random example so of course do your own dd. Also I would advise you to speak with a cpa who is well versed in OZ and since it is newer you may have a difficult time finding one who has investors who already are in those qualified zones. So I might have a few contacts I can collect if you would like. 
I’m into multifamily brrrs in Bradenton and my area does have OZ in it so I’d be interested in hearing and feedback you also receive. 
Good Luck!

 Haha the meetup is at the same time as a men's group I go to on Monday nights, not fair!  If there is some 40% renovation requirement, it wouldn't qualify for this specific deal, but I'd still love to see more on the checklist you're referencing - do you have a link to it?  I was reading on the requirements listed on Fundrise's website, but obviously they're only pooling money to an OZ fund that is designated for that purpose with funds coming from capital gains.  

I do not have a specific link, when I looked it up I went to the government websites and they had all criteria and specifics mentioned. 
men’s group sounds so much cooler, alright you’re off the hook then! 

Good Evening,

Below is an article I wrote in regards to Opportunity zones, I hope it is helpful to you.

The information below is for informational purposes only and does not constitute accounting or tax advice. Persons receiving information through this article should not act or rely upon this information without consulting their own accountants or tax advisors.

The rules for these investments are complex it is advisable to seek professional guidance with a CPA, Accountant, & Real Estate professional before proceeding.

When looking at property investments, especially in the area of Commercial Real Estate, one thing that must always be taken into account is how long or short an individual's or company's holding time is for their investments. Investors want a solid return for their patience long term, unfortunately tax liabilities seem to stand in the way of many well thought out investment plans. The question then becomes "What is the optimal investment strategy to minimize tax liability and maximize appreciation?". The Qualified Opportunity Zone Program added to the Federal tax code by the Tax Cuts and Jobs Act on December 22, 2017 gave investors precisely that, however it wasn't until until June 14, 2018, that the Treasury department certified zones in all 50 states, Washington, D.C., and U.S. territories, and it then took until October 19th 2018 for the IRS to release the proposed regulation taxpayers were in need of for direction. Many people I have spoken with seem to be confused on this program and seem to have some but not all of the information, and I believe that to be directly due to the staggered roll out of program information.

This Opportunity Zone Program gives investors the ability to roll over profits from the sale of capital assets such as Real Estate or company stock into areas that have been deemed "Opportunity Zones". Qualified Opportunity Funds or QOF's's may invest in Real Estate or Businesses located in these approved zones and allow you to delay paying capital gains on the rolled over profits through December 31st 2026. (You may also transfer property other than cash as an investment into a QOF, however a transfer of non cash property may result in only part of the investment being eligible for tax benefits)

Opportunity Zone Scaled Benefits No alt text provided for this image

The Opportunity Zone tax benefits have been structured in a tiered approach as follows; if an investor retains an Opportunity Zone investment for at least 5 years, 10% of the initial investment is excluded from being taxed. After seven years this increases to 15%, and after 10 years you can pocket any money you earn from the zone investment TAX FREE. This cannot be stressed enough! If held for 10 years, that investor can pay ZERO capital gains tax on the new investment in the fund. I believe that to be the real reward here: if you hold your investment in these opportunity zones in a QOF, you essentially pay no tax on your returns, which could lead to a 25-40% increase in your annualized return! These deferred taxes on capital gains and a potential tax-free profit in the future creates an incredible combination of financial incentives for beginner to advanced investors as well as large developers and commercial users.

Opportunity Zones are similar in some ways to 1031 like kind exchanges (1031's allow investors to defer taxes on gains from the sale of a property by reinvesting the proceeds from the sale in another property within 180 days). A major difference is 1031's do not allow for you to permanently exclude any portion of your profit from taxes, which Opportunity Zones as we now know allow for investments held for at least 10 years in a QOF. Another difference that is important to note is where 1031's require an intermediary to hold the funds until the next investment is in place, Opportunity Zone Funds do not need to be kept separate, you just need to file IRS Form 8949 with your income taxes to report your investment to the IRS.

To utilize these tax benefits you must invest capital gains into vehicles known as Qualified Opportunity Fund's, which aggregates money from investors and uses it to acquire and improve properties or businesses in opportunity zones within 180 days of the sale of a capital asset. You may choose to work with an existing fund who's portfolio fits the area and type of property you are interested in putting your money into, or form your own fund. One major confusion I have been hearing is that you must invest as much into the property as you pay for it however the tax code states it must be "substantially improved". As clarified in the recent Revenue Ruling by the IRS, the term substantially improved means that taxpayers must double their adjusted basis in the property after purchase and during any 30-month period that they hold their qualified opportunity zone property. The additions to basis must exceed the adjusted basis in the property at the beginning of such 30-month period. Land is excluded from the adjusted basis calculations..

As mentioned you may set up your own QOF, a Qualified Opportunity Fund can either be set up as a partnership or corporation you must self certify by filing IRS Form 8996, with the companies Federal income tax return. Also an LLC can be an Opportunity Fund as long as they are treated as a partnership or corporation for federal tax purposes. The fund is required to hold at least 90% of its assets in the qualifying Opportunity Zone area.

Another side of Opportunity Zone investing is investing in businesses which many have yet to breach into. The guidelines for a business a QOF can invest in is; they must perform at least half of their services in a zone, pay half of their wages in the zone, or generate half their income from a mix of property and management functions in a zone. There are some businesses deemed "sin business" that are disqualified from Opportunity Zones they are; any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or facility used for gambling, and any store the principal business of which is the sale of alcoholic beverages for consumption off the premises. The attraction to business investing however has remained low due largely to the unknowns. With Real Estate in 10 years your building is in the same location as the day you purchased, and if it is giving good returns in the first 5 years the chances are it will continue to give positive returns for 10 years. Whereas with a business in 10 years it could be acquired, move to another location, go public, completely change their business model, or just downright fail. Something to take into consideration in regards to risk exposure when looking at Real Estate vs Business investment is while a Real Estate Fund can be set up for a single project most Business Funds need to diversify their investment over several companies to offset any losses should any of the companies fail.

As investors get more comfortable with Opportunity Zone Investment I believe we will see the Real Estate investment side quickly saturated by investors as the guidelines are simpler and the deals are easier to analyze. After these investors have taken the premium investments off the table more and more will turn to the business side of the Opportunity Zones. Business investors and Real Estate investors in QOF's can and will work in tandem to secure offices, warehouses, or manufacturing space for a growing company to lease out and benefit investors on both the Real Estate and Business side by providing leasable space to growing businesses both held in QOF's. Inevitably these two sides will come together as property owners need tenants and companies need a business location providing dual benefit.

Informational Links Below:

IRS Opportunity Zones FAQ's

Great post.  I just set up an opportunity zone fund for a purchase. Frustrates me that the 15% step up is impossible since is comes due in 2026 (6 years).  The deferment and 10% step up does help though.  

It's a great opportunity if you do it right and do it in the right zone. I'm closing next week on a commercial building located in an OZ where there's almost 80 million dollars of government & private development happening. My understanding is that you also have to improve the build(minus land) within 30 months by the same amount of the value at purchase to get the tax benefits. There's also usually some local grants and incentives if you look. The OZ I'm in the city has relaxed the zoning so it's much easier. There still another 3 commercial buildings in this OZ I'm considering purchasing, and I'm looking at the OZs in some nearby cities too.  

Originally posted by @Joel Kleyer :

@Natalie Kolodij Can you BRRRR in an OZ fund and pull that cash out tax-free?

Any time you BRRRR the refinance part is tax free.

Buying in an opportunity zone doesn't offer any tax benefit unless you roll in a qualifying capital gain (flip won't qualify)

Originally posted by @Natalie Kolodij :
Originally posted by @Joel Kleyer:

@Natalie Kolodij Can you BRRRR in an OZ fund and pull that cash out tax-free?

Any time you BRRRR the refinance part is tax free.

Buying in an opportunity zone doesn't offer any tax benefit unless you roll in a qualifying capital gain (flip won't qualify) 

Thanks! I am managing a fund consisting of capital gain money and didn't know if there were any IRS regulations against using the BRRRR method in a QOF.

@Joel Kleyer

There are some additional nuances to the BRRRR Method in an OZ investment. The IRS applies a complicated set of "disguised sale" rules to leveraged distributions from a Qualified Opportunity Fund. There are several layers to the analysis, but in general, a leveraged distribution within the first two years of the Opportunity Fund will trigger early recognition of your previously-deferred capital gain. If the leveraged distribution happens after the two year mark, then it generally won't disrupt your deferral.

That said, if you BRRRR and keep the proceeds in your Opportunity Fund and use them to acquire your next OZ property (rather than taking a distribution of the refinance proceeds), then that won't implicate the disguised sale rules. You just have to watch you 90% asset test -- since cash counts as a non-qualifying asset in a QOF, if you finish your refinance and can't get the cash redeployed in a new property before your June 30 or December 31 testing dates, that extra cash could cause your fund to fail its 90% asset test.