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Investing in Qualified Opportunity Zones
Tax benefits and potential risks
The government allows any participating investor to defer paying tax on capital gains from the sale of property in these areas if those gains are invested in a qualified opportunity fund. That fund, in turn, must invest 90 percent of its assets in businesses or property used in one of these designated low-income communities.
Depending on the holding period, eligible capital gains from investments in a qualified opportunity fund can avoid tax on up to 15 percent of the original gain and defer tax on the remaining original gain until the sale of the fund or the end of 2026.
Real estate investment firms, private equity firms, Silicon Valley start-ups and others have eagerly begun to raise capital for qualified opportunity funds. Many tax questions come into play as companies and individuals evaluate the benefits of investing in opportunity zones. To receive the maximum tax benefit, investors must understand their options and plan accordingly.
Additional Qualified Opportunity Zone Insights
The IRS FAQ states that 1231 gains invested in a QOF before the second set of proposed regulations can still be eligible for gain deferral.
Specially designated districts designed to fuel economic growth where development has been stagnant offer investors tax-saving options.
To make opportunity zone projects as financially viable, developers need to consider state and local tax credits beyond QOZ incentives.
RSM partner Troy Merkel discusses qualified opportunity zones and their tax benefits with RealCrowd’s CEO Adam Hooper.
Opportunity zones could be beneficial for both commercial real estate professionals and the communities they invest in.
The Tax Cuts and Jobs Act of 2017 established opportunity zones to encourage long-term investments in low-income communities nationwide.
The IRS released proposed regulations and a Revenue Ruling providing guidance on the newly created Qualified Opportunity Zones.
Opportunity zones incentivize real estate developers to build in low-income communities to spur economic development and job growth.
Taxpayers need to consider the tax benefits (deferral and possible exclusion) of investing realized gains in opportunity zone funds.
The TCJA established Opportunity Zones for taxpayers to invest proceeds from property sales in a fund to defer capital gains tax.