What Are Opportunity Zone Tax Benefits?
Opportunity zones were part of the 2017 Tax Cuts and Jobs Act, and they offer three primary tax breaks for real estate investors that use a qualified opportunity fund. These tax breaks or benefits include a permanent exclusion on long-term holdings of at least 10 years, a basis step-up of previous gains invested, and a temporary capital gains deferral.
Opportunity zones are meant to lead to economic development in regions considered low-income, undercapitalized, or somehow in need of investment. The final guidance was not enacted until late 2019, right before the COVID-19 pandemic began, so it might be a long time before the effect of the investment in opportunity zones is truly recognized.
Billions of dollars have been committed to over 8,700 census tracts, which make up about one-eighth of the United States. These census tracts are included in the opportunity zone program. The potential for these census tracts as a tax break win-win for both distressed communities and real estate investors will definitely bring more attention as time goes on.
If you are interested in this real estate investment opportunity, it’s important to learn as much about the opportunity zone concept and its tax benefits as you can. Here are some of the main tax benefits:
● Types of gains eligible. According to the IRS, both qualified Section 1231 gains and capital gains are eligible for deferral through investments this year as qualified opportunity funds, as long as they are noted in your federal tax returns by January 1, 2027. These no longer unrealized capital gains might come from real estate, stocks, or other investments.
● The temporary deferral. The temporary deferral is the shorter of the deferral periods since there is also a permanent deferral. You are allowed to defer from including in your gross income the gain from the exchange or sale of a property to an unrelated person, as long as it is invested in a qualified opportunity fund during the 180-day period starting on the date of the exchange or sale. You must include either the year that the investment is exchanged or sold or December 31, 2027, whichever date comes first.
● The step-up in basis. You can also benefit from the increase in the basis for capital gains that are reinvested in a qualified opportunity fund, but it depends on how long you hold the deferred gain. For example, it begins with a 10 percent increase if the investor holds the investment for five years or more, and it increases by 15 percent if you hold the investment for seven years or more. This means that up to 15 percent of your original investment can be saved from being taxed.
● The permanent exclusion. The permanent exclusion is considered the best and most powerful of the tax benefits, but it also takes the most dedication since it is primarily targeted towards long-term capital gains. If you hold onto a qualified opportunity fund investment for 10 years or more, then any gains that it makes in value after you invest in it are permanently excluded from the capital gains tax.
