Tax benefits from Qualified opportunity zones

Columbus, OH · Member since 2018 · 164 posts · 126 votes

Hello tax experts

Any recommendations on how to avail tax benefits on capital gains, was researching and found out QOZs (qualified opportunity zones) there is a new tax law which allows capital gains to be invested in QOZs and can get investor tax break till 2026 or so... any further-insight on the subject is appreciated and any source where I can avail more info

Cheers

Sachin

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

Originally posted by @Sachin Amin:

Hello tax experts

Cheers

Sachin

Quick run down there are 2 benefits that come from the QOZ and both need to be present.

Step 1: You need a capital gain to defer now.

Step 2: You invest that in one of the zones via a QOF, you can self report this on your own taxes for a single property.

Step 3: You must substantially improve the prop within 30 months. Meaning put as much into renovations as the building basis. OR build new if it started as raw land.

Step 4: Hold that new property for 5-10 years with increases in basis at the 5,7,10 year marks.

Step 5: At the end of 2026 (or if you sell sooner) you recognize the gain you originally deferred but the raised basis now makes the gain only 85% of what it was originally. So you save 15% here

Step 6: Second benefit- as long as you've held that new property for 10 years if you sell it any NEW gain related to appreciation in that property is tax free.

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Will Hodges
Accountant · Grapevine, TX · Member since 2015 · 12 posts · 5 votes
7y
Mods - just curious why my post was removed?
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Sachin Amin:

Hello tax experts
Any recommendations on how to avail tax benefits on capital gains, was researching and found out QOZs (qualified opportunity zones) there is a new tax law which allows capital gains to be invested in QOZs and can get investor tax break till 2026 or so... any further-insight on the subject is appreciated and any source where I can avail more info
Cheers
Sachin
Quick run down there are 2 benefits that come from the QOZ and both need to be present.
Step 1: You need a capital gain to defer now.
Step 2: You invest that in one of the zones via a QOF, you can self report this on your own taxes for a single property.
Step 3: You must substantially improve the prop within 30 months. Meaning put as much into renovations as the building basis. OR build new if it started as raw land.
Step 4: Hold that new property for 5-10 years with increases in basis at the 5,7,10 year marks.
Step 5: At the end of 2026 (or if you sell sooner) you recognize the gain you originally deferred but the raised basis now makes the gain only 85% of what it was originally. So you save 15% here
Step 6: Second benefit- as long as you've held that new property for 10 years if you sell it any NEW gain related to appreciation in that property is tax free.
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Will Hodges:

Mods - just curious why my post was removed?
Did you suggest he reach out to you (self promo) and or link to your own blog?
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Will Hodges
Accountant · Grapevine, TX · Member since 2015 · 12 posts · 5 votes
7y
Originally posted by @Natalie Kolodij:

Originally posted by @Sachin Amin:
Hello tax experts
Any recommendations on how to avail tax benefits on capital gains, was researching and found out QOZs (qualified opportunity zones) there is a new tax law which allows capital gains to be invested in QOZs and can get investor tax break till 2026 or so... any further-insight on the subject is appreciated and any source where I can avail more info
Cheers
Sachin
Quick run down there are 2 benefits that come from the QOZ and both need to be present.
Step 1: You need a capital gain to defer now.
Step 2: You invest that in one of the zones via a QOF, you can self report this on your own taxes for a single property.
Step 3: You must substantially improve the prop within 30 months. Meaning put as much into renovations as the building basis. OR build new if it started as raw land.
Step 4: Hold that new property for 5-10 years with increases in basis at the 5,7,10 year marks.
Step 5: At the end of 2026 (or if you sell sooner) you recognize the gain you originally deferred but the raised basis now makes the gain only 85% of what it was originally. So you save 15% here
Step 6: Second benefit- as long as you've held that new property for 10 years if you sell it any NEW gain related to appreciation in that property is tax free.
Great summary. One thing that I would add is that if you have an investment in a pass-through entity (i.e., partnership, S corporation, estate or trust) and that pass-through entity had capital gains this year that they did not elect to defer (i.e., invest in a QOF), then you have 180-days from the end of the pass-through entity's taxable year to invest your allocable share of the capital gain amount. This is important to keep in mind as a lot of entities will extend their returns and won't issue K-1s until the end of the summer which by the time you received the information it may be too late. It might be worth requesting additional information from your applicable entities if this is the case.
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Will Hodges
Accountant · Grapevine, TX · Member since 2015 · 12 posts · 5 votes
7y
Originally posted by @Natalie Kolodij:

Originally posted by @Will Hodges:
Mods - just curious why my post was removed?
Did you suggest he reach out to you (self promo) and or link to your own blog?
Haha no neither one - just wrote an example of how a QOF investment would work.
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Sachin Amin
OP
Columbus, OH · Member since 2018 · 164 posts · 126 votes
7y
@Natalie Kolodij. Thank you for a detailed explanation, appreciate it...
I am into flipping houses and my next venture is in one of the QOZs but I read you mentioned I have to hold it for 5-10 yrs .. which makes me think if this applies to my case.. because once I fix the property get and tenant in , I sell the property off and the capital gain i get are re-invested in my next venture.
So now iam thinking does it Benefit in cases like mine?
Cheers
Sachin
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Sachin Amin
OP
Columbus, OH · Member since 2018 · 164 posts · 126 votes
7y
@Will Hodges
Thank you for info sir...
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Sachin Amin:

@Natalie Kolodij. Thank you for a detailed explanation, appreciate it...
I am into flipping houses and my next venture is in one of the QOZs but I read you mentioned I have to hold it for 5-10 yrs .. which makes me think if this applies to my case.. because once I fix the property get and tenant in , I sell the property off and the capital gain i get are re-invested in my next venture.
So now iam thinking does it Benefit in cases like mine?
Cheers
Sachin
Hi sachin,
Flipping houses qualifies as ordinary income- not capital gains. So that can't be reinvest in the QOZ any way.

I would talk with a tax professional to look into other tax reduction strategies that work for house flipping.
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Sachin Amin
OP
Columbus, OH · Member since 2018 · 164 posts · 126 votes
7y
@Natalie Kolodij
Also flipping is my side job - I am a software engineer by profession and have a full time job that make things little tricky as any additional income i make is tax deductible and I am looking for opportunities how I can save on taxes..
Sachin
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Sachin Amin:

@Natalie Kolodij
Also flipping is my side job - I am a software engineer by profession and have a full time job that make things little tricky as any additional income i make is tax deductible and I am looking for opportunities how I can save on taxes..
Sachin
I'm not sure what you mean by any additional income you make being tax deductible?
That's fine - even if you're doing it on the side its' still treated the same as any side business by the IRS so it's ordinary income taxes.
A good tax pro will help you keep your taxes on your business as low as possible/
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Sachin Amin
OP
Columbus, OH · Member since 2018 · 164 posts · 126 votes
7y
@Natalie Kolodij
Sure.. HR block does my taxes I’ll post details in few weeks on how I did...
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Sachin Amin:

@Natalie Kolodij
Sure.. HR block does my taxes I’ll post details in few weeks on how I did...
Feel free to reach out to one of the tax pros on BP when you need that amended.
H&R Block isn't tax pros. I amend more H&R block returns than self prepared. They take a weekend course.
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Sachin Amin
OP
Columbus, OH · Member since 2018 · 164 posts · 126 votes
7y
Sure, i think some one locally(Columbus, OH) reached out to me from BP - i will definitely get my situation reviewed with multiple tax consultants and based on the predicative analysis I will go with one offering overall better solution.
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Yannik Cudjoe-Virgil
Rental Property Investor · Baltimore, MD · Member since 2016 · 253 posts · 178 votes
7y
Originally posted by @Sachin Amin:

Hello tax experts
Any recommendations on how to avail tax benefits on capital gains, was researching and found out QOZs (qualified opportunity zones) there is a new tax law which allows capital gains to be invested in QOZs and can get investor tax break till 2026 or so... any further-insight on the subject is appreciated and any source where I can avail more info
Cheers
Sachin
Hey, The key point in this is you have to double your basis in the property. It has to be "substantial improvement." The basis is based on the improvements percentage on the assessed value. Meaning if the property is assessed at 100k value and the improvements is 70k or 70% and the land is 30k or 30% then you will have to put in $70,001 in improvements for it to be considered. Hope that makes sense.
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Sachin Amin
OP
Columbus, OH · Member since 2018 · 164 posts · 126 votes
7y
@Yannik C- V.
Yep..understood...
Cheers
Sachin
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Cody DeLong
Gorham, ME · Member since 2018 · 280 posts · 186 votes
7y
@Will Hodges thank you for mentioning this K1 bit. I had asked this in another post and this was the answer I’m looking for. I’m sitting on my capital gains right now waiting to pay the state and fed a nice portion of it. However I planned on buying real estate anyways. A couple questions:
I have $52k in capital gains from my K1. I don’t have the full $52k, only $30k. But by the time I need to invest it I could have he full $52k, will that matter when I do my taxes? Can I say I put $52k into a self funded Opportunity Fund if I do plan on bringing that much in?
Second question is debt. Say I buy a property for $100k and the building is worth $50k. I take a loan out for $100k and spend the $52k to fix it up. That would all be fine as I can bring debt to the opportunity fund.
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Cory Tuck
Professional · Topeka, KS · Member since 2016 · 29 posts · 14 votes
7y
On the Opportunity Zones please also note that we are very early on in understanding how the final IRS regulations will impact Opportunity Zone Investments and Funds. The IRS release dthe first round of guidance in October 2018 with comments out to the public. With the shutdown, the finalization of the 1st round of guidance has yet to happen. On 2/14 we should have better guidance but there will still be a lot of unanswered questions. There is an expectation of multiple rounds of guidance given the complexity of the situation.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
Originally posted by @Cody DeLong:

@Will Hodges thank you for mentioning this K1 bit. I had asked this in another post and this was the answer I’m looking for. I’m sitting on my capital gains right now waiting to pay the state and fed a nice portion of it. However I planned on buying real estate anyways. A couple questions:
I have $52k in capital gains from my K1. I don’t have the full $52k, only $30k. But by the time I need to invest it I could have he full $52k, will that matter when I do my taxes? Can I say I put $52k into a self funded Opportunity Fund if I do plan on bringing that much in?
Second question is debt. Say I buy a property for $100k and the building is worth $50k. I take a loan out for $100k and spend the $52k to fix it up. That would all be fine as I can bring debt to the opportunity fund.
Yes, you can use full 52k if that whats your K-1 passes to you. The money doesn't even have to be sourced.
And, yes you can leverage the investment in the fund. But the debt doesn't get the same preferential treatment as the capital gains. Your capital gain investment and the debt are treated as two different investment so that capital gain can get the step up basis and deferral if qualified.
The bookkeeping and tracking have to be done correctly. Work with the professional if you need to.
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Cody DeLong
Gorham, ME · Member since 2018 · 280 posts · 186 votes
7y
@Ashish Acharya What do you mean by source?
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Will Hodges
Accountant · Grapevine, TX · Member since 2015 · 12 posts · 5 votes
7y
Originally posted by @Cody DeLong:

@Ashish Acharya What do you mean by source?
I believe Ashish is meaning that if you have $52k of capital gains on a K-1, but you haven't received the cash proceeds from the entity yet, then you can still invest $52k in total that would be eligible for QOF even if you pull that money in from elsewhere.
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