Opportunity Zone Funds
“The Most Unbelievable Tax Break Ever” - Forbes Magazine
Triple Play Tax Break: New Opportunity Zone Funds Cut Your Taxes Three Ways
As part of the December 2017 Trump tax cut, an unlikely group of billionaires and politicians quietly inserted a generous and complicated new tax break designed to lure big dollars into struggling areas known as Opportunity Zones, or O-zones. About 8,700 O-zones nationwide, ranging from run-down inner cities to dusty rural hamlets, have already been designated. But investors who want to take advantage of the new O-zone tax scheme can't plow money into these areas directly. Instead, they must do so through qualified opportunity funds, or O-funds. These funds will have remarkable freedom to invest in just about anything---from real estate to tech start-ups---so long as it's located in an O-zone and isn't a business Congress considers a vice. (No casinos, liquor stores or massage parlors.)
Intrigued? To get started you sell highly appreciated assets and invest cash equal to your capital gain into an O-fund. Discover just how this three-part tax break could work for someone selling assets this year, as well as the extraordinary amount this shelter can save wealthy folks in the top income tax bracket. Forbes Magazine - Janet Novack - Personal Finance
Defer and Reduce your Capital Gain Tax and Pocket your Basis
Opportunity Funds are a new investment vehicle given to us by the Tax Cuts and Jobs Act of 2017. They allow you to roll over the capital gains from the sale of your multi-unit investment property asset within 180 days, and defer the capital gains tax until 12/31/26.
If your capital investment is held in an Opportunity Funds for:
• 5 years - you will receive a 10% basis increase in the original investment.
• 7 years - you will receive an additional 5% basis increase, bringing the total basis increase to 15%.
• 10 years - you are exempt from tax on the gains from your capital investment in the Opportunity Fund.
To be clear - the amount of your capital gain from your sold asset and subject to tax will have been reduced based on the years you keep the capital in the Opportunity Fund and the return on these invested funds will not be subject to ANY capital gain tax after 10 years.
Example: you purchased a $200,000 property in 2010. In 2019 you sell the property for $400,000 and roll over the $200,000 capital gain into an Opportunity Fund within 180 days. In 5 years, the basis in your original investment of $200,000 increases by 10% to $220,000, which reduces your capital gain by $20,000. And in 7 years your basis increases another 5% to $230,000, which reduces your capital gain by a total of $30,000. You hold the investment for 10 years. And during this time, your $200,000 investment in the Opportunity Fund appreciates to $300,000. Because you held the investment for 10 years the tax on your $100,000 gain from the Opportunity Fund investment is eliminated.
The upside of using Opportunity Funds is you can defer and reduce your capital gain on the sale of your investment rental property. The capital gain on the Opportunity Fund itself is exempt from tax if you hold your investment for 10 years. Also, unlike 1031 Exchanges, you don’t have to roll over the entire sales proceeds, you just have to roll over the capital gain. So, you can pocket your original investment in the property that you sold and use these funds as you wish. However, at this time, you will still be obligated to report depreciation recapture based on your depreciation schedule of your sold investment property.
You must roll over any capital gains you wish to defer by 12/31/19 to receive the full benefits of Opportunity Funds. While you can invest more than just your capital gains, but only your capital gains are eligible for these tax benefits.
For more information and a list of Opportunity Fund investment vehicles or you would like a Broker’s Opinion on the Current Value of your Investment Rental Property, contact Andrew at Golden Real Estate (720) 710-1000 direct. Or, simply fill out the form below for a fast response.