What Is An Opportunity Zone?
An Opportunity Zone is a tract of land designated by the federal government to incentivize economic development in distressed communities. The investment is incentivized by giving investors extremely attractive tax benefits. As a simplified explanation, you can roll over capital gains from a previous selling event (not necessarily real estate) within 180 days and defer taxes on those profits, similar to a 1031 Exchange. Additionally, you can receive a deduction of those capital gains equal to up to 15%. If that wasn't good enough, if you hold your investment in the opportunity zone for at least 10 years then you pay ZERO capital gains on your OZ profit when you exit.
Unsurprisingly, there are some contingencies to reap these rewards. First, in order to make an investment you can't do so directly. You have to invest through a registered Qualified Opportunity Fund, or QOZ. If you fill out the form below we can direct you to a lawyer who can file this for you. Secondly, you have to make an investment equal to the cost basis of the improved property. So if you were to buy a $1M property in an OZ through a QOF and the land value was worth $400k, then you'd have to invest an additional $600k into the business or real estate asset.
In January 2019, Bob sells his business for $3M and makes $2M in capital gains. Bob invests the entire $2M in capital gains into a QOF within 180 days of selling after returning from a trip to Turks and Caicos. In 2019 he pays no taxes on the $2M in capital gains instead of paying what would have been $400k (20%) in taxes. After 10 years the $2M he invested into the QOF is now worth $4M. So he exits the fund and pays the deferred $320k from 2019 (he saved $80k from the initial deduction in 2019), while paying zero capital gains tax on the $2M profit he made in the fund. Bob returns to Turks and Caicos to retire and buys a nice condo with his additional $480k in tax savings. This is a simplified example, but you can see that clearly these incentives can be very attractive.