There’s big money to be made in real estate, but many investors shy away because of capital gains taxes. After closing a sale, you could end up paying 20-percent in taxes. However, a change in tax laws now encourages investors to rebuild communities by reducing the capital gains tax. Here’s everything you need to know about how opportunity zones can help you save money on your tax bill.
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What Are Opportunity Zones?
High taxes often kept investors from purchasing properties in rundown communities. As a way to help rebuild America, the Tax Cuts and Jobs Act of 2017 created opportunity zones. These zones include thousands of low-income neighborhoods in all 50 states. Why are opportunity zones such a big deal to investors? Qualified opportunity zone investments let investors temporarily defer capital gains taxes. This tax reduction increases profit margins and encourages investors to spend more money.
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Where Did the Idea for Opportunity Zones Originate?
Contrary to popular belief, Congress isn’t solely responsible for creating opportunity zones. The idea actually came from Sean Parker, the billionaire behind Napster. He noticed many wealthy investors were hesitant to sell their assets because of high tax rates. Instead, cash sat untouched. Parker believed the government should offer tax breaks to encourage investing in underdeveloped communities.
Parker worked tirelessly with senators to create legislation that would ultimately become the Tax Cuts and Jobs Act of 2017. Under the act, local governments would identify low-income areas that needed an economic boost. The capital gains tax cut would encourage investors to pump money into these areas, benefiting both themselves and members of the community.
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When Do Investors Benefit from Opportunity Zones?
The tax benefits become available as soon as the investment is sold. The only stipulation is that the part of the gain must be invested in a qualified opportunity zone. However, you don’t have to invest the entire proceeds. As long as you invest a portion, no matter how small, you qualify for the tax benefits. Furthermore, the investment doesn’t have to be a real estate property. The sale of a business, stocks, bonds, or another investment with taxable gains qualifies.
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Why Should Investors Consider Opportunity Zones?
Investors often hold onto unwanted investments to avoid high capital gains taxes. Opportunity zones provide huge savings when an investor finally exits. Owning a property in a qualified opportunity zone may also appreciate tremendously.
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How Do Investors Take Advantage of Opportunity Zones?
Although the verbiage in the act is complex, actually taking advantage of the tax deferment is easy. All you need to do is sell an investment and invest the capital gains into a qualified opportunity zone. The longer you hold the opportunity zone investment, the more money you’ll save. After ten years, you wouldn’t pay any capital gains taxes on the appreciated investment.
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How Do Investors Find Qualified Opportunity Zones?
There are qualified opportunity zones in all 50 states. Each state nominates low-income communities to be labeled as an opportunity zone. Once the U.S. Treasury certifies the community, it’s listed on the IRS website for investors to search.
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How Can You Learn More about Opportunity Zones?
You can learn a lot about qualified opportunity zones on the internet. However, if you want the latest, most factual information, it’s best to visit the IRS website directly. They have a helpful list of frequently asked questions that will help you decide if this is the right investment opportunity for your tax situation.
Defer Taxes and Improve American Communities
Opportunity zones give wealthy investors a unique chance to make a real difference in American neighborhoods. The money invested in these zones directly benefits impoverished areas. Imagine being able to give back to the community while making a handsome profit. That is precisely how opportunity zones help people across all socio-economic classes.
