The end of the year compels many people to think about tax planning, which in turn prompts us to highlight a feature of the new tax law that could provide significant benefit to real estate investors. It has to do with what are called “Opportunity Zones.”
These zones are economically distressed, low-income communities, and according to the Wall Street Journal the zones encompass almost 9,000 census tracts with a population of nearly 35 million. A list of the zones can be downloaded from this IRS page.
In a nutshell, the benefit to investors is that they can defer the capital gains on an existing investment until the end of 2026 by rolling those gains into an Opportunity Zone project. In addition, they can avoid capital gains on the new investments in the zone if they hold them for at least 10 years
Like a number of provisions in the Tax Cut and Jobs Act, not all of the details were in place when the law was passed, but the IRS did in fact release regulations about this on October 19, 2018. Apparently there are still some loose ends and the IRS in their FAQ says they will be “…providing further details, including additional legal guidance, on this new tax benefit” over the next few months.
Those who enjoy parsing the tax code can peruse the current version of the regulations. You can find more readable summaries at National Real Estate Investor or here if you have an online subscription to the Wall Street Journal.
A key takeaway from the Journal article is that this tax break appears to have been designed to give investors reasonable flexibility. For example, it cites that “…as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break.” The regulations so far don’t seem to have a lot of hidden trap doors or “gotchas.”
It would appear that this tax break provides an opportunity for investors to free up capital that is sitting dormant in properties they’re reluctant to sell because of what would otherwise be a capital gains tax burden. Now investors should be able to benefit from at least one if not two tax breaks, and at the same time do something positive for their communities.
What do you think? Are you likely to pursue a project in an Opportunity Zone?
— Frank Gallinelli
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One thought on “Opportunity Zones = Defer or Avoid Capital Gains Tax”
Yes, Frank. Absolutely. We have a fast growing college town, south of Austin, TX that’s ripe to benefit, as a designated Opportunity Zone. Keep the info coming on this topic, as you learn more. Love your books, BTW!