We’ve all seen communities impacted by hard times, formerly bustling streets that now house vacant and rundown buildings. Lack of investment into these areas intensifies an already difficult situation within the communities that are significant to us. However, with the addition of real estate tax credits and incentives, the aim is to spur the private investment required to breathe life into these struggling economies
The potential is not just for the communities that benefit from this investment. By harnessing the power of real estate tax credits and incentives; real estate project developers, owners, and investors can realize some lucrative savings. One of those is the newly crafted Qualified Opportunity Zones (QOZs). Proper use of investment in QOZs can reduce tax liability and help you get the most return on investment. In this blog, we’ll take a closer look at this opportunity and how it can be utilized.
What are Qualified Opportunity Zones?
Qualified Opportunity Zones (QOZs) are tracts of land selected by the Governor of each state. Subsequent to the Governors’ approval, the U.S. Treasury Department approved and designated approximately 9,000 tracts as QOZs across the United States. These specifically designated areas focus on distressed sections of rural and urban communities. Since the designations were approved, these areas have experienced a spike in potential projects through the interest of community investors and developers.
Why should you consider investing in a Qualified Opportunity Zones?
Despite numerous regulatory guidelines pending final approval, QOZs present a unique investment strategy that should be considered sooner rather than later. Through the proper channels of investment and by using a Qualified Opportunity Fund (QOF) as the investment vehicle, capital gains realized in a year can be rolled over, and the related taxes deferred. Depending on the subsequent holding period and meeting specific requirements throughout the life of the deferral, investors can experience significant tax savings. Not only will individual taxpayers gain from the overall deferral and reduction of taxes, but the associated communities within the QOZs will also reap tremendous benefits. Through job creation and continuous improvement of our communities, investment will be aligned with public wellbeing.
In general and based on the holding period within the QOF, taxpayers will experience the following incentives:
- Investment within QOF held for at least 5 years results in a 10% reduction of capital gains tax
- Held within QOF for an additional 2 years (at least 7 years) results in a 15% reduction
- A holding period of at least 10 years = NO TAX ON SUBSEQUENT GAINS
A key point is the usage of a QOF to act as the investment vehicle. Through semi-annual self-certifications by the QOF, your investment has the potential to benefit significantly.
How does it work?
When a taxpayer realizes a capital gain, the option is now available to rollover that income into a QOF. Once in a QOF, specific requirements must be met including a minimum investment of at least 90% of the fund’s assets into the QOZ property. There are several assets that qualify as QOZ property. One of these assets is a secondary investment into a QOZ business; this essentially sets up a two-tiered structure which has several advantages to the taxpayer and creates extraordinary flexibility. As the QOF continues to meet the requirements and maintains compliance, taxpayers will take advantage of the before-mentioned incentives.
Not only does investment in Qualified Opportunity Zones bring financial savings to taxpayers, it also has the potential to have a tremendously positive impact within communities across the country. To find out more about the utilization of Qualified Opportunity Zones and other real estate tax credits, join experts Tim Klimchock and Ryan Luckenbaugh on their upcoming webinar.
Ryan Luckenbaugh, CPA, Advisor
As an advisor in SN’s Architectural, Engineering, and Construction Group, Ryan focuses on helping clients navigate the business challenges within their industry, as well as assisting with compliance requirements. Ryan works closely with clients to understand their unique needs and provides them with strategies to accomplish their goals.