Q: What are Qualified Opportunity Zones?
A: Qualified Opportunity Zones (QOZ) are designated areas that provide tax advantages for real estate investors.
Q: Who came up with this tax advantage?
A: Believe it or not, Napster founder, and former Facebook President, Sean Parker did. The tech billionaire was seeking a solution to investor cash sitting on the sidelines, that could otherwise be invested in underdeveloped areas. He worked with senators to introduce and pass the legislation in the Tax Cut and Jobs Act of 2017.
Q: When are these tax benefits available?
A: They become available when an investment is sold, and the gain realized is invested in a Qualified Opportunity Zone (QOZ). Unlike a 1031 Exchange, the investment is not limited to a real estate for real estate exchange. The gains could be from the sale of a business, stocks, bonds, or any investment with taxable gains. It should also be noted, there is no requirement to reinvest the entire proceeds of the sale. You could potentially pocket cash and still defer all the gains by reinvesting only the gain portion of the proceeds. Even better, depending on the amount of time you stay invested in the QOZ the tax on the deferred gain could be reduced by up to 15%, and the new investment could be entirely tax free at disposition! Even better you have 180 days from the time of your investment sale to reinvest in a QOZ giving you time to make that decision.
Q: Why should a QOZ interest me?
A: A QOZ allows you or your investors to exit a current investment with gains and defer capital gains taxes resulting in potentially massive savings. If you own land or property in a QOZ, it may be worth more than you think.
Q: How do I take advantage?
A: Benefitting from a QOZ is easier than you might think. Simply (1.) sell an investment that has appreciated in value, and (2.) invest the gain in value into a QOZ.
Case Study of How it Works:
Beat the Taxman.
John has successfully navigated the long and winding road of the lawn maintenance business. He started his business from scratch, so his original basis in his business was $0. After working eight days a week to build his business into a success, he sells it to Paul for $1,000,000. Great news for John, right? I don’t want to spoil the party, but John’s $1,000,000 return on the sale of his business means he has to write a check for $260,000 to pay his capital gains taxes.
The euphoria John feels at selling his business quickly turns to frustration as his tax reality settles in. He turns to his tax accountant, George, for help. George tells him about Qualified Opportunity Zones.
John calls real estate investment buddy Ringo, and Ringo finds John a qualified opportunity. John buys the real estate. Below are John’s options and corresponding tax consequences depending on how long he holds the investment.
If John holds the investment for five years he would defer the capital gain of $260,000 until the asset is sold. John would then get a 10% discount on his gain for investing in a QOZ. This leaves John owing $234,000 instead of $260,000, and he is able to defer the gain for 5 years.
If he holds for 7 years the discount on his gain would be 15% and he would owe $221,000.
As to the Qualified Investment, If John holds the investment for ten years in a QOZ he would pay ZERO tax on any gains on appreciation from real estate investment in the QOZ.
Breakdown: John invested $1,000,000 into a Qualified Opportunity Zone. He holds it for 10 years and sells it for $2,000,000. John defers tax on the original investment until the time of sale and receives up to a 15% discount at the time of sale, and he owes ZERO capital gains on the QOF investment portion of the sale, saving him $299,000 in capital gain taxes simply because he invested in a Qualified Opportunity Zone. AMAZING!
If you’re still reading this, you’re probably intrigued and have more questions. While this is the flash version of the program, I’ve also included some helpful links below. If you have questions, feel free to reach out to me directly or comment below. Be sure to tune in next week for “The Flash Guide to Setting up a Qualified Opportunity Zone Fund.”
Where do I find Qualified Opportunity Zones?
Where is the best place to find more information about Qualified Opportunity Zones?
-Andrew L. Propst, MPM® CPM® CCIM®