Looking for information or experiences with Opportunity Zone
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
Saw a SF house for sale in an Opportunity Zone. Is OP still available? Does it expire the end of this year like other parts of the tax law? Anybody have experiences with Opportunity Zones, both good and bad? Was it worthwhile for you? Thanks in advance.
The Opportunity Zone (OZ) program provides for three tax incentives:
That last one is key because the current laws are set to expire at the end of 2026, as noted in the first bullet point. The next two years will be crucial for OZ investors to plan for the impending tax liability that will become due when the deferral period ends.
Now, the gain originally deferred will preserve its tax attributes until it is recognized, so if you wait too long you will lose all benefits. While there's a chance the OZ tax provisions are extending, we aren't seeing enough momentum to really rely on that. So, if a short-term capital gain is originally deferred with an Opportunity Zone investment, it will be recognized as short-term capital gain when included in taxable income as of December 31, 2026.
It’s also important to consider that a valid deferral election is required to make a qualifying Opportunity Zone investment; otherwise, the investment receives no tax benefits, including the exclusion of tax on the appreciation of the investment. Two years seems like some time, but real estate investors know this goes by in a flash.
Here are some pretty great links to further information and depth as well: https://www.irs.gov/credits-deductions/opportunity-zones-fre...
https://www.irs.gov/credits-deductions/businesses/opportunit...
Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.
The Opportunity Zone (OZ) program provides for three tax incentives:
That last one is key because the current laws are set to expire at the end of 2026, as noted in the first bullet point. The next two years will be crucial for OZ investors to plan for the impending tax liability that will become due when the deferral period ends.
Now, the gain originally deferred will preserve its tax attributes until it is recognized, so if you wait too long you will lose all benefits. While there's a chance the OZ tax provisions are extending, we aren't seeing enough momentum to really rely on that. So, if a short-term capital gain is originally deferred with an Opportunity Zone investment, it will be recognized as short-term capital gain when included in taxable income as of December 31, 2026.
It’s also important to consider that a valid deferral election is required to make a qualifying Opportunity Zone investment; otherwise, the investment receives no tax benefits, including the exclusion of tax on the appreciation of the investment. Two years seems like some time, but real estate investors know this goes by in a flash.
Here are some pretty great links to further information and depth as well: https://www.irs.gov/credits-deductions/opportunity-zones-fre...
https://www.irs.gov/credits-deductions/businesses/opportunit...
Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.
@Jason Zundel Thanks much appreciated!
@David Krulac I have a significant amount of experience in OZ structuring and often times it becomes more of a hassle unless you are doing large projects.
@Jason Zundel is totally on the mark with his run down of OZ benefits so I wont dive any deeper than that other than to comment that despite the deferral being for only about 2 years under current law, the biggest benefit that a lot of my clients are still going after is the permanent gain exclusion for future appreciation if you hold the asset for another 10 years.
The part that I wanted to dive into that a lot of investors are unaware of is the structure that is required to actually make a qualifying OZ investment.
For whatever reason, congress made it so that you need to acquire OZ property within a partnership structure or a corporate structure, not just in your own name via a SMLLC. This means if you don’t have another partner, you typically would need to not only form a MMLLC, but you would also need to form an S corp to become a partner in your MMLLC so that you can effectively have a partnership.
That amounts to two different additional tax returns that you would need to file at a minimum just to have a qualifying entity structure to become able to make an OZ investment (or only one if you have another partner willing to co-invest, eliminating the need for the S Corp).
Many people don’t realize that it is not the acquisition of the property that triggers the qualifying gain deferral, it is actually the mere contribution of cash into a qualifying entity structure that causes the deferral. Then it is just up to the entity to use that cash to buy and improve qualifying property to avoid penalties.
The other overlooked requirement is the original use or substantial improvement test.
This means that it is not enough to simply buy property in an OZ, but you have to either develop a building from the ground up or you need to take an existing building and at least spend as much renovating it as you spent acquiring it in the first place.
I am happy to dive into this deeper if you would like - just reach out.
@Dylan Brown Thank you, very much.
@David Krulac - Very happy to help!
@Dylan Brown - Excellent additions, and agree with your analysis. I especially like the reminder and point on the original use or substantial improvement requirements, those are an extremely important consideration when looking into the OZ investment opportunities.