If you are thinking of expanding your investment portfolio, chances are you would be in search of high-end properties offering assured returns and a proper build-up. We get it; properties located in the best of locations can be a huge prospect for assured returns.
But did you know that if you invest in an economically-distressed community, you can defer the capital gain taxes on your 1031 proceeds? Yes, we are talking about investing in qualified opportunity zone fund.
And, if you have questions about opportunity zones, read on to explore the most common questions investors ask.
What Is A Qualified Opportunity Zone?
A qualified opportunity zone is a low-income, economically-distressed area identified by the US Department of Treasury. The federal government incentivizes these opportunity zones by offering preferential tax treatment to the investors.
The tax code of the 2017 Tax Cuts ad Job Acts included opportunity zones back in December 2017.
What Is The Purpose Behind Opportunity Zones?
Qualified opportunity zones are primarily identified to incentivize investors into investing in these zones to boos economic development. The money invested by the investors is then used to develop these zones to stimulate employment opportunities in that area.
Who Can Invest In Opportunity Zones?
Factually, anyone can invest in a qualified opportunity zone fund. However, in most cases, the investment often comes from investors looking to invest their 1031 exchange proceeds into a replacement property.
What Are The Benefits Of Investing In Qualified Opportunity Zones?
In addition to helping you do good for the society, investing in opportunity zones usually comes with massive tax advantages.
Simply put, investing in opportunity zones through a qualified opportunity find (QAF) can help you defer your capital gains taxes and qualify for a 10% reduction in your capital gains taxes, given you keep your QAF investment for at least five years. Moreover, if you hold your investment for at least seven years, you can qualify for an additional 5% incentive on your capital gains. Meaning, you can get a 15% reduction in your capital gains taxes on QAF funds. Additionally, if you hang your investment for at least 10 years, you can eliminate the capital gains taxes on your QAF investment altogether.
Are Qualified Opportunity Zones And Qualified Opportunity Funds The Same?
No, while qualified opportunity zones are distressed areas where you are required to invest to earn tax benefits, qualified opportunity funds act as an investment vehicle, usually set up by a company or an organization. In short, if you want to invest your money in an opportunity zone, you must invest through an opportunity fund.
What Are The Rules To Invest In An Opportunity Zone?
To qualify for tax treatment, you must meet certain requirements for investing in a qualified opportunity zone.
- You must invest your gain through a qualified opportunity fund.
- Capital gain investment from any capital asset sale or exchange to an unrelated third party qualifies for tax benefits.
- You must invest your gains within 180 days of selling your investment property to qualify for tax relief.
- A qualified intermediary is not required.
- Although this one is not mandatory, it is often recommended to hold your QAF investment for at least 10 years to leverage the most tax benefits.
Is Investing In Qualified Opportunity Funds A Right Choice?
Honestly speaking, like all other real estate properties, opportunity zones are also associated with a certain risk factor. However, if you do your research closely and choose the right opportunity zone to invest in, you can defy the risk factor and earn some outstanding tax benefits. Moreover, the money you invest in these qualified opportunity zones creates job opportunities and stimulates the economic development of a specific location. So, you can rest assured that your investment is going for a good cause.