With the 2017 Tax Cuts and Jobs Act, you may have heard about the tax advantages of opportunity zones.
What Are Opportunity Zones?
Opportunity zones are designated areas of economically distressed communities identified by the U.S. Treasury Department where new investments may be eligible for preferential capital gains tax treatment. By investing in qualified opportunity funds, an investor can defer and reduce their tax liability on their capital gains. They can also potentially receive tax-free treatment for all future appreciation. If done right, this tax advantage is huge.
Opportunity Zones At Work
A lot of words are packed in here, so let’s illustrate the opportunity with an example:
- Let’s suppose you have a capital gain of $1,000,000 due to a recent sale transaction of stock, a business, or another piece of real estate. Your capital gains tax liability (the amount you’d be taxed) might be roughly $371,000, depending on the type of asset sold, and taking into account the current Federal capital gains tax rate, State taxes, and the Investment Healthcare surtax.
- You have the option of investing the equivalent amount of your capital gains of $1,000,000 in a Qualified Opportunity Fund, to defer and reduce your tax liability if you hold onto the Opportunity Fund for at least seven years.
- After seven years, the capital gain is reduced by 15%, and you must pay the tax on the original deferred capital gain, let’s now say $850,000 capital gain. The estimated tax in year seven is $315,350.
- The savings and the upside: That’s a tax savings of $55,650 by deferring for seven years, and the opportunity upside of the original $371,000 you received by deferring the tax. That’s a lot of savings and upside!
Now here’s where opportunity zones really kick into high gear:
- Any further capital gain by the Opportunity Fund is tax-free after ten years. Let’s think about that for a moment. Tax-free after ten years!
So let’s suppose the original Opportunity Fund investment appreciates from $1,000,000 to $2,000,000. The new gain of $1,000,000 is capital gains tax-free. Whereas, if you did not invest in a qualified fund, the estimated capital gains tax would be another $371,000, on top of the tax you paid on your original investment 10 years ago.*
So what are the risks? Well, as with any investment, an investment in a qualified opportunity fund program is subject to various risks, tax law changes, and economic cycles. Since they are in higher risk, economically distressed areas they carry additional risk. But if done right, these can be big upside opportunities on tax savings. If you’re thinking about whether these are right for you, consult with your tax advisor on this.
ABOUT DANIELLE LAZIER + ASSOCIATES
In 2018, Danielle Lazier + Associates sold over $104,000,000 in SF Bay Area residential real estate selling more homes than any other SF Realtor (per MLS). We specialize in listing marketing and home buyer representation. We work with a diverse clientele in terms of budget, property type, and location, but one thing remains consistent: our clients have a clear goal to maximize their San Francisco real estate investment and want us to help them because we deliver both results and an enjoyable experience.
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About Virg Cristobal: If you’d like to learn more about Opportunity Zones and how they may fit into your own situation, please contact Virg Cristobal, CFP®, at Virg@MyOpenAdvisors.com, or follow-me on Twitter, @CFP_Virg