If you are a real estate investor then you may have heard a lot of talk recently about opportunity zones. However, you may not know exactly what they are and how you can benefit from them. Qualified Opportunity Zones (QOZ) came into being as part of the Tax Cuts and Jobs Act of 2017. They are areas in major cities that are in need of redeveloping. If you are prepared to invest in these areas then you will be eligible for tax breaks. This means building a development in one of these areas has the potential to be very profitable for investors.
This legislation was actually the idea of Sean Parker, the man who founded Napster. He was also the President of Facebook when the social media site was just getting started. He is a very wealthy man but there were plenty of times when he felt that there were no worthy projects that he was able to invest in, despite having the cash available. He worked alongside the government to come up with the 2017 legislation which meant that more money would be invested in low income areas that have been overlooked for development in the past.
If you are interested in taking advantage of these opportunity zones, then it is important that you have a good understanding of how this legislation works. There are some key aspects of the legislation that you will need to be aware of so that your investment pays off in the way that you hope it will.
The tax benefits of a QOZ will be realized when an existing investment is cashed in and the gains from this are reinvested into a QOZ. It does not matter if the inital investment is anything to do with real estate or not. As long as the gains from the investment are taxable then it is eligible.
Another thing that you need to be aware of is that there is no need for you to invest all the returns that you have from your initial investment. Only the gain portion of the returns need to be invested in the QOZ and this means that you can keep some of the cash that you have gained for yourself.
If you can keep your new investment in the QOZ for a substantial period then you could receive a further 15% tax discount. This has the potential to make the gains from the QOZ and the point of disposition is completely tax-free. If you feel like you need more time to decide whether investment in a QOZ then a new investment can be made up to 180 days after the initial investment has been cashed out so there is plenty of time for you to make the decision.
You do not have to invest in a QOZ that is in your state but some people prefer to see exactly where their money is going. For this reason, you may want to invest in a project that is local to you. There is a list of all Zones that are available to be invested in that has been compiled by the US Treasury in partnership with the Community Development Financial Institutions Fund (CDFI Fund). There are also maps available that you can look at which will give you a better idea of how the areas are going to be redeveloped.
This overview has some of the basic information about investing in QOZs but you will need a lot more information than this before you make any investment. There is a detailed guide on the IRS website which will provide you with a lot more information. If you have a financial advisor, then you may want to discuss your options with them before you make any final decision.
In order to make the most of the QOZ you need to keep your investment for at least ten years. Although you can get your money out whenever you want, in order to get the most benefit from it in terms of tax cuts, you need to keep hold of the investment for a long time. Therefore you need to be confident that you can afford to be without this money for the period of the investment.