How do Opportunity Zones Work?
So, you’re curious about Opportunity Zones and how they work. Have you heard the term Opportunity Zone but can’t make sense of them? Well, you’ve come to the right place this article will help to explain them a bit. I get a ton of questions about this topic and how the OZ’s work here’s a bit of info to help you get started
**Disclaimer**I’m not a tax advisor or CPA so please consult one to see how you can best leverage the perks of being an OZ investor. In fact here’s a look at what the IRS has to say about OZ’s
Here’s how the program works:
The government has outlined certain low-income areas in need of Real Estate Investment and dubbed them “Opportunity Zones” (in this article I’ll call them OZ’s). The purpose of the OZ’s is to provide a quid pro quo where investors or investment firms in exchange for investing capital in real estate and infrastructure projects in OZ’s, can receive several tax breaks.
What are the tax breaks I’m eligible for as an OZ investor?
Investors can temporarily defer their taxes on previously earned capital gains that they reinvested in an OZ fund within 180 days. Investors can defer taxes on these gains until the end of 2026 or until the investment is sold (whichever comes first).
Is the OZ right for me?
To take full advantage of the OZ’s you’ll need to hold the investment long term. Flipping or a short term investment won’t allow you to reap the benefit of the OZ’s
If an investor holds their gains in an OZ fund for five years, they can exclude 10 percent of those gains from taxation.
If an investor holds their gains in an OZ fund for another two years (for a total of seven), they can exclude another five percent from taxation which means that taxpayers can exclude up to 15 percent of the value of reinvested capital gains from their taxable income.
Gains achieved after the investment is made in an OZ fund are tax-free, if the investment is held for at least ten years.
Investing in OZ’s can be a solid option if you are a buy and hold investor in these areas or are working towards becoming one, as you know the OZ areas cap rates and R.O.I’s can prove to be quite lucrative. Consider these funds/tax breaks icing on the cake as they can help to increase the value of these investments and help to restore the luster of these areas that could use a shot in the arm.
P.S. Want to find out where the OZ’s are located? Check out the link below from the department of treasury CDFI Fund: