Opportunity Zones continue to be a hot topic in the commercial real estate world – and for good reason. Here in southeastern North Carolina investors have the opportunity to benefit from this new tax incentive.
Opportunity Zones were established to help revitalize communities that are considered economically distressed by using private investments rather than taxpayer dollars. In our previous post, we look at what are opportunity zones and why they could be a good investment opportunity for you.
Today, we’re breaking down the tax incentives and how Opportunity Funds differ from a 1031 Exchange.
Why are Investors Excited about the Opportunity Zone?
The Investing in Opportunity Act has set unprecedented tax incentives for investors allowing them to defer and reduce their capital gains tax burden. Investors are able to defer paying federal taxes on these capital gains until the end of 2026. In fact, in some cases, Opportunity Zones present a tax-free profit if held for a defined period of time.
When investors do pay taxes on them, the amount paid may be reduced by 10% after five years and by 15% seven years after the funds were invested. If the investor holds the opportunity fund for at least 10 years, they receive a permanent exclusion from paying capital gains taxes on the amount invested.
What are Qualified Opportunity Funds?
A Qualified Opportunity Fund (QOF) is an investment vehicle which is organized by any legal entity (LLC, Partnership, etc.) for the purpose of investing in opportunity zones. A QOF must hold at 90% of its assets in qualified opportunity zone property and 70% of the tangible property must be opportunity zone property.
How do Opportunity Funds Differ from the 1031 Exchange?
Both investments in Qualified Opportunity Funds and the 1031 Exchange are designed to provide tax incentives to taxpayers who reinvest proceeds from a sale into another property; however, the programs have key differences.
1031 Exchange allows investors to defer the gain from only the sale of real estate. With QOF, the gain deferral can be from any capital gain, stock sale, personal property, or real property.
With the 1031 Exchange, the entire sale price must be exchanged for a like-kind property. With QOF, only the capital gain needs to be reinvested. Both programs require the funds to be reinvested within 180 days.
1013 Exchange allows for a flexible holding strategy. The taxpayer can do another exchange into a better property if the current one turns out to not be ideal. QOF holding strategy is more defined. A 5 year holding period is required to get a 10% gain exclusion, 7 years to get a 15% gain exclusion, and 10 or more years to get future benefit.
These are just a few of the key differences. To determine the best investment strategy for you, we recommend having a discussion with our team and as well as your financial advisor.
How do You Start in Investing in Opportunity Zones?
There are more than 8,700 qualified Opportunity Zones in the US. While Opportunity Zones present a great opportunity for both you as an investor and the community, research and due diligence on the property are still vital. It is important to know the zoning restrictions, public infrastructure, and future plans for the area. Our team can help you find the property that fits your needs.
In many cases, investors can often start investing in opportunity funds with a relatively low investment. For example, a fund in Washington, D.C. has a minimum investment of $25,000 (source Fund Rise). This on top of the tax incentives make Opportunity Zones an attractive option for investors.
To learn more about Opportunity Zones in southeastern North Carolina, contact our team.
What are Opportunity Zones?
Opportunity Zones Frequently Asked Questions – IRS
What are the Tax Incentives of Investing in Opportunity Zones?