Do you want to go for a property investment in the United States? Then you can think about investing your money to buy a property that is located in one of the opportunity zones. There are over 8,700 opportunity zones out there in the country. By investing your money to buy a land in an opportunity zone, you will be able to experience numerous benefits. Keep on reading and we will share the key benefits that you will be able to experience. While keeping these benefits in mind, you just need to go ahead with getting the maximum return out of your investment.
Table of Contents
What exactly is an opportunity zone?
Before you go ahead with opportunity zone investments and experience the benefits that are coming on your way, you need to understand what exactly an opportunity zone is. An opportunity zone is an economically distressed community. Such a community would deliver preferential tax treatments for the investments who can spend their money in long run. This will take place according to the federal tax rules.
You can think about calling opportunity zone as an excellent economic development tool based on taxes. This economic tool has been designed to spur investments. On the other hand, it has the ability to create numerous job opportunities as well. The best thing about opportunity zone program is that it is benefiting the most troubled areas of the country. Therefore, this program has the potential to contribute towards the overall development of the country in the long run.
There is a criteria that will be evaluated when determining what an opportunity zone is as well. It is important for a census tract to nominate that zone to be an economically distressed zone. Then the IRS and the United States Treasury would do an evaluation on it. Based on the outcome of this evaluation, a property will be called as an opportunity zone
In general, for a property or a zone to be considered as an opportunity zone, it is important to showcase that the poverty rate of that region is at least 20%. On top of that, it is important to understand that the median household income is under 80% of the overall median household income that it could receive from the neighbors.
As of now, there are around 8,700 certified opportunity zones in the country. You will not just be able to find these opportunity zones in the rural states of the country, but in all the states. They include the Five U.S. territories and the District of Columbia as well. When you take a look at the definition of opportunity zone, you will get the impression that all property located within an opportunity zone are rural. However, this fact is not true at all. You will even be able to find some opportunity zones within the inner city limits. Therefore, people who wish to go ahead with opportunity zone investments are provided with some great options available to consider. You just need to take a look at those opportunities and make sure that you are receiving the best results.
There are opportunity zone explorers available on the internet for you to use. It is possible for you to use such an opportunity zone explorer and start looking for the opportunity zones available out there. Based on that, you will be able to start spending your money to buy the property that is located in the opportunity zones.
What are the benefits of investing money in the opportunity zones?
Now you have a basic understanding on what an opportunity zone is all about. While keeping this fact in mind, let’s explore all the benefits that you can experience by investing your money on opportunity zones available out there in the country.
- Federal tax benefits
When you are exploring the benefits that come along with investing money in opportunity zones, you can’t simply ignore the tax benefits that you can receive. This is because the opportunity zone is based upon federal tax law. There are numerous tax benefits that you will be able to experience as you go ahead with investing your money on the opportunity zones.
Along with time, the investment that you do in one of the opportunity zones will be able to deliver three main tax benefits. These tax benefits will be based upon the Qualified Opportunity Fund that you create. Out of the three tax benefits that you can experience, the very first two benefits would be applicable on the original capital gains that you are investing. However, the third benefit would be somewhat of a long term tax benefit that you can experience along with the appreciation of value of your property, which is located in the opportunity zone. Let’s deep dive and explore more details about these tax benefits.
- Deferral of taxes
Along with investing your money in an opportunity zone, you will be able to defer the tax amount, which you will have to pay in the capital gains. When you sell a property for investment, you will have to pay capital gains taxes. However, you can sell the property and hold that money in an opportunity zone fund. By doing this, you will get the opportunity to refrain from paying the capital gains tax payment.
This benefit is currently applicable for the amount of money that you will be able to earn in between 22nd of December 2017 and 1st of January 2027. You just need to make sure that you are investing your money on an opportunity zone. However, it is also important to keep in mind that there is no possibility for you to defer a gain, especially if that took place from an exchange or sale of a property along with a related party. You should keep this in mind and go ahead with the transaction, so that it will be possible for you to experience all the benefits that come along with opportunity zone investing.
The tax deferrals are usually extended up until 31st December 2026. When that time reaches, the underlying gain that you have will be taxable. However, it will be reduced from the exclusion percentage that you have, which varies based on the overall holding period. If you can hold your investment for a longer time, it will be possible for you to get better returns that are coming to you with it.
You should also keep in mind that there are two different events that can put an end to the deferral period before an earlier date. For example, if you go ahead and sell or exchange a portion of the investment, or an inclusion event took place, it will not be possible for you to get this amount.
- Exclusion of taxes
Exclusion of taxes would take place when you hold the investment that you made in the opportunity zone for a period of over five years. This is where you will be able to exclude up to 10% of the deferred gain that you can get out of the federal capital gains tax. Therefore, you will only have to pay 90% of the original amount that was given to you as the capital gains tax amount.
Even in here, you can experience some key benefits by holding your investment for a longer period of time. For example, if you hold your gains for a period of more than seven years, it will be possible for you to exclude 15% of the deferred tax gains that you are receiving from the federal capital gains tax. Therefore, you will only have to pay 85% of the tax amount that you are supposed to pay.
- Paying taxes based upon step up in basis
You will be able to hold the opportunity zone property investment for a period of over 10 years as well. This is where you will be able to get the best return out of your investment. After holding the investment for over 10 years, the tax basis associated with it would increase. Therefore, it will be getting a reasonable market value. This is where you can sell or exchange the property. This will provide you the chance to get the benefit in a stepped up basis. In other words, the investment that you do within the opportunity zone would appreciate tax free. This is kind of similar to what happens with a Roth IRA Investment. This is a promising return that you can get from the investment because you will not have to pay any capital gains tax for the appreciation when you are selling or exchanging your land.
Even if you are selling the opportunity zone property investment before the 10-year time duration, you will be able to roll that over to any other qualifying investment as well. This is another key benefit that people who have gone ahead with opportunity zone investments will be able to experience.
- State tax implications
The state tax structure would usually conform to the existing federal internal revenue code. While keeping this in mind, you should understand that the tax rules associated with the investments are applicable at the state tax level as well. However, this would not be the case at all times. This is quite complicated. That’s because the investment that you do in an opportunity zone could involve more than one state.
There are few states, which would have conformity provisions that are taken out of the community while having the opportunity zones. Because of that, you will not be able to get any state tax benefits out of the investment that you do.
It is important for the people who go ahead with investing on opportunity zone to understand that the state tax levels, and the federal tax levels are not in sync at all times. This is something that we can see in terms of the opportunity zones. If you can understand this complication, it will be possible for you to proceed with experiencing the benefits that comes on your way with the opportunity zone property investments that you can do.
How to invest in opportunity zone property?
If you are convinced by the benefits that come on your way with opportunity zone property investments, you will need to understand how to proceed with the investments, so that you can receive all the benefits that are coming on your way.
The opportunity fund that you have should be in a position to hold 90% of the asset through ownership. The opportunity zone property investments can therefore be complicating. This is why you are encouraged to get the assistance of an expert and proceed with the investments. An expert will clearly provide you with a better picture on what you can expect to receive out of the investments. By keeping this understanding in mind, you will be able to proceed with the opportunity zone property investment and get the best return that comes on your way.
As you can see, opportunity zone property investments are a great opportunity available for the people who wish to invest their money in buying land in the United States. If you don’t want to pay a considerable amount of money on capital gains tax, this will be a great opportunity available for you to defer the taxes. All you should do is to understand the basics of opportunity zone property investments and learn how this kind of an investment can benefit you. While keeping that understanding, you can proceed to the next stage of your investment. This is where you will be able to get numerous amazing benefits that are coming on your way.
Get in touch with an expert real estate investor and discuss your need to invest on opportunity zone property. Based on your discussion, you can understand all important details on how to get the most out of your investment.