How to Invest in Opportunity Zones and Avoid Capital Gains

Before you undertake any investment projects, you’ll need to gain a thorough understanding of what an opportunity zone is and what its tax perks are. If you’re always looking for ways to diversify your portfolio, this may be an excellent investment that you can explore.

Opportunity Zones: Two Ways to Invest

Before you put money in an opportunity zones real estate investment, know the basics. You can invest in two ways. Many investors use Opportunity Zone funds to invest. The IRS defines this fund as a Qualified Opportunity Fund, an investment vehicle created for QOZ investing. Another way to invest money in Opportunity Zones is through a REIT. An Opportunity Zone REIT (also known as a real estate investment trust) is a company that owns and manages real estate investment projects. You can invest in real estate by buying a stock in the REIT. You invest indirectly in the property.

What are Opportunity Zones?

One of the questions you might ask is: is it worth investing money in opportunity zones? The short answer is yes. Opportunity zones offer tremendous tax benefits to those who can afford them. If you can invest in an Opportunity Zone, through REIT or Opportunity Zone funds, investors can defer their capital gains taxes with ease. If they sell an asset for a gain, they have 180 days to put the money into a Qualified Opportunity Fund. Another benefit of using opportunity zone is that by increasing your tax basis, you can reduce future capital gains.

What Taxes Apply to Opportunity Zones?

Taxes for capital gains apply to the difference between the amount you sell your asset for and the basis. That’s fair, considering that the basis is usually around the amount of your initial payment for the investment. If you want to lower the taxes on your capital gains, though, you can increase the basis. That should lower your taxes by about 10 or 15 percent. You’ll need to hold your investment in the Qualified Fund for about five to seven years for that arrangement to work.

Before You Invest, Know This

Those who choose to put their money in opportunity zones do so for the tax benefits. If they meet all the conditions, they can defer capital gains taxes beyond 2021. However, if you plan to increase your basis, that option is open only for investors who held their investment in the fund for five or seven years before December 31, 2026. That is a seven-year advantage. To qualify, that means the investor should have put the money in 2019 to be eligible for the gains. Some put their money in the fund by December 31, 2021, which makes them eligible for a five-year advantage that is valid until the end of 2026.

Know What the Law Says

The government says only gains recognized on or before December 31, 2026, can be put into Opportunity Zones and enjoy the 10-year permanent exclusion. That gives investors about 180 days to invest their gains, which means June 20, 2027, is the deadline to invest.

Opportunity zones are economically distressed regions that require investment and revitalization. These zones result from the Tax and Jobs Act, which aims to improve economic growth and create jobs by encouraging investment in these regions.

To encourage investment in low-income areas, the government provides tax benefits to people who invest in the opportunity zones created by the government via a qualified opportunity fund.

Creation of opportunity zones

Any areas that qualify as low-income communities and some neighboring regions characterized by population census tracts can qualify as opportunity zones. State governors can nominate several eligible tracts for official designation. After a governor appoints a region, the designation originates from the secretary of the treasury through their delegation of authority to the IRS. Also, the treasury secretary gives the certification of an opportunity zone.

Where are opportunity zones?

Rural areas house over 23% of all opportunity zones. There are 8768 opportunity zones in the united states, which represent 12% of all census tracts. Many opportunity zones have suffered from a lack of investment for many decades. You can find these areas on an interactive map on the US department of housing and urban development website.

Advantages of investing in opportunity zones

1. The main advantage of investing in an opportunity zone is that you can suspend tax payments on capital gains that you get from prior investments. Suppose you allocate capital gains from a prior investment example, opportunity zone real estate development, into a qualified opportunity fund within six months from the sale date. In that case, you are eligible to defer tax payments.

2. Also, if you are an investor of qualified investment funds, you can reduce your tax burdens by holding onto your investment for at least five to ten years.

3. You can avert paying any taxes on gains that you earn on an opportunity zone investment retained for at least ten years.