Defer (and Even Eliminate) Gains Investing in Opportunity Zones

Investors are cheering over the new tax legislation that came out recently stemming from The Tax Cuts and Jobs Act. The Act created Opportunity Zones to spur investment in distressed communities throughout the country. New investments in Opportunity Zones can receive preferential tax treatment. Every state in the U.S. has been mandated to select at least one opportunity zone for each of its counties.

As a result of this legislation, an investor can now take gains generated from outside of a zone and invest it in a business inside of a zone (or Qualified Opportunity Zone Fund) to defer the gains for up to 10 years as well as reduce it down to a 15% rate. Furthermore, appreciation in the investment can grow tax free for up to 10 years.

This sounds great, right? Well, there are a lot of other requirements and rules that can get in the way. For instance, you have to spend at least what you have in the property/business on improvements. Also, if you don't hold the investment for the full 10 years, you won't be able to eliminate all of the gain on the appreciation.

Another factor for us real estate investors to consider will be the type of investing we're doing. If you are a wholesaler or fix-and-flipper, you might have trouble taking advantage of this. One way that I've thought of for wholesalers and flippers to make this work would be through the use of Qualified Opportunity Zone Funds. If you were to create a fund and keep the money reinvested in Opportunity Zones each time you wholesale or flip a property, you might have a good case for using this tax savings vehicle. This strategy is untested and only an idea that I intend to research further.

According to the U.S Treasury's website, the Treasury and the IRS plan to issue additional information on Opportunity Zones and Qualified Opportunity Funds. The additional guidance will address the certification of Opportunity Funds, which are required to have at least 90 percent of fund assets invested in Opportunity Zones.

Please don't misconstrue what I'm writing here as tax or legal advice. I recommend you talk to your CPA about what strategies you can implement to help save you money by investing in Opportunity Zones. If you would like a referral to a good CPA, please reach out via my Bigger Pockets profile.