06 Nov Opportunity Zones, Capital Gains and Main Street, USA
Opportunity Zones include distressed, underdeveloped areas. These are lower economic zones in which both residents and the government would prefer to see a thriving community. Gavrilov & Co introduced Opportunity Zones in the previous blog simply as a part of a News Flash. Now we present some intense details on the subject.
How to Save Money on Capital Gains: Opportunity Zones
The headlines in that blog concerned Opportunity Zones. And, specifically for them, there is a new set of IRS regulations for investors. Just imagine for a minute. What if your city could have an injection of capital for business and real estate development? And what if these funds could be used right in the heart of its most depressed area? The answer to that question resides in the hearts, minds, and wallets of investors.
Thus, the new tax regulations are sweetening the Opportunity Zones Fund investing with some tax breaks for capital gains. At the end of October, the IRS released initial rulings for investors who seek opportunities in real estate and investment in our country’s most distressed areas.
In fact, we have already mentioned that Treasury Secretary Steven Mnuchin gave the new regulations a rave review. He stated, “This could be a $100 billion investment opportunity for real estate and businesses in distressed areas.”
Gavrilov & Co want you to know there will be more regulations for capital gains tax breaks and Opportunity Zones forthcoming this winter, but this blog will show you the latest ones.
How to Qualify for the Special Breaks
First and foremost, we want our readers to know the new laws are very specific:
1. Only Capital gains can qualify for investing.
2. Investors need to know what types of entities can invest in Opportunity Zone funds.
3. Likewise, we want you to be certain about what projects actually qualify.
So, Gavrilov & Co has seen quite a few prominent investors jumping on this bandwagon. This was even before the latest regulations premiered.
Wealthadvisor.com announced that “Goldman Sachs, hedge fund EJF Capital and NY-focused RXR Realty, have already begun making investments in opportunity zones or started raising funds to do so.” Heavily involved in this type of investment also is the entity known as “Enterprise Community Partners.” They are one of the biggest affordable-housing groups in the U.S. We based this blog title on their declaration in September. They stated they were “partnering on an opportunity fund to revive Main Streets in small towns.”
And how could we, the investment and tax planning experts, at Gavrilov & Co help but think this is a noble cause?
The Grand Capital Gains Plan Behind the Noble Cause of Investing in Opportunity Zones
Here is a quick, clear summary of how investing in opportunity zones funds works. And it also indicates a little bit about why in 3 steps:
- Be aware that last year “$6.1 trillion in capital gains was sitting in mutual funds, stocks, and corporations. Investors simply had not cashed in, according to the Economic Innovation Group.”
- Now, think of a big funnel. We could pour that money into economically struggling areas. How?
- The government will be offering tax breaks to investors who reinvest their gains in opportunity zone funds. (So, if you invest in a place that is struggling, they get the help they need. You get the tax credit you crave. Everyone benefits.)
As Gavolov & Co sees it, the key is in investing in qualified Opportunity Funds. That is why the government recently drafted guidance and regulations for these types of funds. It’s also why you should talk to your executive accountant and tax planner at Gavrilov & Co.
This plan could become a gift that keeps giving to the community in the Opportunity Zones. Why? Because the tax break “is likely to spur more funds being created.” This will happen naturally “as investors look for ways to get in on the program.”
An Amazing Result of New Laws: Opportunity Funds Flourishing
As an investor, you can take proceeds that would be subject to capital gains taxes and reinvest in Opportunity Zone Funds. For example, you could use money from the sale of some stocks or the sale of a business. Invest that money into Opportunity Zone Funds. Then, you just defer your capital gains taxes. And over years, you can reduce your capital gains taxes. You could even maintain your investment in 2026. Therefore you might even reduce your capital gains taxes to zero.
Let’s Talk Numbers on Opportunity Zone Fund Investments and Your Tax Dollar
To better understand, let’s set up some numbers: Let’s say Specifically, you invested 100,000.00 in an Opportunity Zone Fund. (First, remember, according to the new laws, you could defer paying taxes on that gain until as late as the end of 2026.)
- Likewise, if you stay “invested in the fund for at least five years, they can exclude 10 percent of the gain from taxation.”
- It gets better! Stay in for 7 years and you can exclude another 5 percent.
- So, if you stay in the opportunity fund for 10 years, any gains generated by their investment in the fund would be tax-free. We referred to CNBC experts, who put it this way:
- For Example: “If you had a $100,000 gain from selling an asset.” And then, you “reinvested it in an opportunity zone fund.” “After seven years the taxable amount of the gain would be $85,000. ($100,000 less the 15 percent reduction of $15,000). And say that initial $100,000 grew to $200,000 over 10 years of being invested in the fund. You could take that $100,000 gain ($200,000 less the initial investment of $100,000) entirely tax-free.”
Let’s Talk about Numbers with Heart: the Opportunity Zone Funds
The Capital Gains Tax Break and Opportunity Zone Funds are a natural fit if you are already investing in real estate. The idea is also popular among people already investing in real estate as a way to give low-income housing and commercial real estate projects a shot in the arm. These financially riskier neighborhoods number roughly about 8,700 opportunity zones, all through the U.S. This is just as we told you in last week’s blog.
The Value of the Land and Opportunity Zone Funds
The IRS rules state that opportunity funds don’t have to include the value of the land when they need to estimate how much the law requires them to spend on renovation. Experts give us this example.
1. A fund pays $1 million for a warehouse and land.
2. The building is valued at $400,000.
3. The fund has to spend at least what the building is valued — not the total purchase price — in renovations.
As you might imagine, that’s a real blessing for investors in urban areas where the land is potentially the most significant portion of a project’s cost.
Therefore, we see, “Developers can spend less to meet the rules for what constitutes a “substantially improving” a building under the law. For some projects, such as affordable housing, investors could have been forced to pay more to improve the building than they would have been able to recoup in rental income, said Mary Burke Baker.” Ms. Baker is a “government affairs counselor at law firm K&L Gates.”
We Advise Thinking Quickly: “Best” Opportunity Zone Funds Might Fill Up Fast
There might be a time limit on how effective Opportunity Zone Investments, in general, will continue to be highly profitable. Projects are filling up every day.
Mary Burke Baker added, “There is some concern that the good projects — those in the more desirable areas — will be competitive,” Baker said. In urban areas, it will be easier to attract investment than in rural areas.”
The Big Take-Away Today
Remember one more point. If you intend to be an investor in opportunity zone funds, you are only permitted 180 days from the sale of your stock or business to put the proceeds in an opportunity zone fund.
Only then will you qualify for the tax breaks. Talk to your executive account tax planner. We can help. We know real estate, investing and the newest tax laws.
Thank you for reading the blog at Gavrilov & Co. And stay tuned for more information by the end of the year, as the IRS releases more data.