What are the Capital Gains Tax Benefits of Opportunity Zones?
Investing in an Opportunity Zone can significantly reduce an investor’s capital gains tax liability, which is important if the investor owns one or more assets that they plan to sell in the near future. Capital gains tax is the tax charged on profits that are made when an investor sells an asset, such as a piece of real estate, stock in company, or an expensive collectable.
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Investing in an Opportunity Zone can significantly reduce an investor’s capital gains tax liability, which is important if the investor owns one or more assets that they plan to sell in the near future. Capital gains tax is the tax charged on profits that are made when an investor sells an asset, such as a piece of real estate, stock in company, or an expensive collectable.
Capital gains tax can come in multiple varieties; short term capital gains taxes, which are levied against assets that are purchase and sold within a 12 month period, and long term capital gains, which are levied against assets held longer than 12 months. Fortunately, Opportunity Funds allow investors to defer both short and long-term capital gains taxes until December 31st, 2026, and to reduce the amount of their capital gains exposed to taxes, provided that they keep the money in the fund for at least 5 years. To do this, an investor must re-invest their funds within 180 days of the gain being recognized.
Long Term vs. Short Term Capital Gains Taxes
Short term capital gains are generally taxed the same way as ordinary income. So, for instance, if an individual bought stock for $40,000, and 8 months later, sold it for $50,000, and they were in the 24% income tax bracket, they would have to pay 24% tax on those $10,000 of gains, or $2,400. In comparison, long-term capital gains taxes are either 0, 15, or 20%, depending on an individual’s income for the year they are selling the asset.
In 2019, single filers earning $39,375 or less pay 0% taxes on long-term capital gains, single filers earning between $39,375 and $434,550 pay 15%, and single earning $434,550 or more pay 20%. These rates change slightly for married couples filing jointly or married individuals filing separately.
When an individual sells business property and makes a profit, it is generally treated as a 1231 gain, which, like short-term capital gains, is taxed at an individual’s ordinary tax rate. 1231 gains also be deferred until December, 31, 2026 via investing in an Opportunity Fund.
Another type of gain, the unrecaptured 1250 gain, occurs when depreciable real estate (i.e. rental property and certain business real estate) is sold. Unrecaptured 1250 gains are typically taxed at 20% (the maximum long term capital gains tax rate), though they may be taxed at lesser rates under some conditions. They are only realized when 1231 gains are not recognized as ordinary income. If the 1250 gain is unrecaptured, it’s eligible to deferred until December, 31, 2026 via investing in an Opportunity Fund. However, 1245 and recaptured section 1250 gains do not qualify for deferral.
Capital Gains Taxes and Partnerships
Partnerships and other pass-through entities (such as most LLCs) have slightly different rules when it comes to the investment timeline required to defer capital gains taxes via an Opportunity Fund. If the partnership/LLC as a whole is deferring capital gains, than they have 180 days after the gain was recognized to reinvest into an Opportunity Fund (just like individual investors). However, if the deferral is being made by an individual partner, they can decide to begin their 180 day period on the final day of the partnership or LLC’s taxable year.
Related Questions
What are the tax benefits of investing in Opportunity Zones?
The Opportunity Zones program permits individuals to defer eligible capital gains until December 31, 2026, provided that they invest in an Opportunity Fund, a specialized financial vehicle that must place at least 90% of its assets in commercial real estate or qualified businesses within one of America’s 8700 census tracts designated as Qualified Opportunity Zones. In addition, investors can take advantage of a 10% reduction in their capital gains tax basis, provided they hold their investment for a minimum of five years before December 31, 2026. Investors may utilize a further 5% reduction in their capital gains tax basis if they hold the investment for a minimum of seven years. For more information, please see this page and this page.
How do Opportunity Zones provide tax incentives for investors?
The Tax Cuts and Jobs Act of 2017 created a new tax incentive program to encourage capital investment in economically distressed areas of the U.S. Via the use of opportunity funds, investors can qualify for the tax incentives offered by the Opportunity Zones program. In order to qualify, investors must invest through an Opportunity Fund. If an investor keeps their money in an Opportunity Fund for at least 5 years prior to December 31, 2026, they will reduce their deferred capital gains tax liability by 10%, while if they keep funds in for seven years before that date, they can reduce their tax bill by 15%. In some cases, investors may even reduce their tax liability to zero on any profits they generated by investing in an Opportunity Fund, though they will need to hold their investment in the fund for at least 10 years in order to qualify.
Source: A Guide to the Opportunity Zones Program for Commercial and Multifamily Real Estate Investors
What are the capital gains tax benefits of investing in Opportunity Zones?
The Opportunity Zones program permits individuals to defer eligible capital gains until December 31, 2026, provided that they invest in an Opportunity Fund. In addition, investors can take advantage of a 10% reduction in their capital gains tax basis, provided they hold their investment for a minimum of five years before December 31, 2026. Investors may utilize a further 5% reduction in their capital gains tax basis if they hold the investment for a minimum of seven years. For more information, please see Opportunity Zones in Commercial Real Estate and The Top 10 Tax Benefits of Investing in Commercial Real Estate.
How do Opportunity Zone investments reduce capital gains taxes?
The Opportunity Zones program, created as a result of the Tax Cuts and Jobs Act of 2017, is a way that commercial real estate investors can defer paying capital gains taxes on the sale of investment properties. Investors who invest assets in an Opportunity Fund within 180 days of their sale may defer capital gains taxes until they sell their investment or by December 31, 2026, whichever occurs first. In addition, investors who keep their money in an Opportunity Fund for at least 5 years will receive a 10% reduction of their capital gains tax liability, while those who keep their investment in the fund for at least 7 years will receive an additional 5% discount, for a total 15% capital gains tax discount. And, investors who keep their money in an Opportunity Fund for at least 10 years will not have to pay any capital gains taxes on any additional appreciation their investment has experienced since it was placed in the fund.
For more information, please visit Capital Gains Taxes in Commercial Real Estate and Opportunity Zones in Commercial Real Estate.
What are the long-term capital gains tax benefits of investing in Opportunity Zones?
Investors who keep their money in an Opportunity Fund for at least 5 years will receive a 10% reduction of their capital gains tax liability, while those who keep their investment in the fund for at least 7 years will receive an additional 5% discount, for a total 15% capital gains tax discount. And, in what may be the most appealing element of Opportunity Fund investing, investors who keep their money in an Opportunity Fund for at least 10 years will not have to pay any capital gains taxes on any additional appreciation their investment has experienced since it was placed in the fund. Source.
How do Opportunity Zone investments defer capital gains taxes?
The Opportunity Zones program, created as a result of the Tax Cuts and Jobs Act of 2017, allows commercial real estate investors to defer their capital gains taxes until December 31st, 2026, provided they reinvest their money into an Opportunity Fund. Opportunity Funds are specialized investment vehicles which must place at least 90% of their assets in qualified businesses or investment properties located in one or more of the 8,700 Qualified Opportunity Zones throughout the United States. In addition to deferring capital gains taxes for up to 8 years, investors who hold their investments for a minimum 5 of years prior to December 31, 2026 can take a 10% reduction in their capital gains tax basis. And, investors who hold their investments held for a minimum 7 of years prior to December 31, 2026 can take an additional 5% reduction in their capital gains tax basis (for a total 15% reduction). To take full advantage of the program, however, investors must place their money in an Opportunity Fund before December 31, 2019. Source 1 and Source 2.