In the storybooks, you have the Wizard of Oz. But, here in the ole USA, we have the President of OZ (Opportunity Zones) and in the land of opportunity zones. You can defer, reduce or eliminate your capital gains taxes from scenarios like stock sales or real estate sales.

I suspect you would be skeptical or your default thinking would be to think of a 1031 Exchange program.

Well, on December 22, 2017, as part of the Tax Cuts and Jobs Act a new preferential tax treatment was signed into effect making Opportunity Zone investments, under certain conditions an economic development tool where you can defer, reduce and eliminate taxes.

Here is a quick visual example of a hypothetical investment.

Let’s dig a little deeper and break down some of the hold periods (5,7 and 10 years) and using a smaller growth rate of 7%.

Investments held 10 years: The taxable amount of the capital gains reinvested is reduced by 15%, and no tax is owed on appreciation. For example $100,000 of capital gains is reinvested into an Opportunity Zone fund and held for 10 years. Tax owed on the original $100,000 is deferred until 2026, and taxable amount is reduced to $85,000 ($100k minus $15k). The investor will owe $20k of tax on the original capital gains (23.8% of $85k). No tax is owed on Opportunity Zone investment’s capital gain. Assuming a 7% annual growth rate, the after-tax value of the original $100,000 investment is $176,000 by 2028.

Investments held 7 years: The taxable amount of the capital gains reinvested is reduced by 15%. For example $100,000 of capital gains is reinvested into an Opportunity Zone fund and held for 7 years, selling in 2025. The taxable amount is reduced to $85,000 ($100k minus $15k). The investor will owe $20k of tax on the original capital gains (23.8% of $85k). Assuming a 7% annual growth rate, the investor will owe $15k in tax (23.8% of $61k) on the Opportunity Zone investment’s capital gain.

Investments held 5 years: The taxable amount of the capital gains reinvested is reduced by 10%. For example $100,000 of capital gains is reinvested into an Opportunity Zone fund and held for 5 years, selling in 2023. The taxable amount is reduced to $90,000 ($100k minus $10k). The investor will owe $21k in tax on the original capital gains (23.8% of $90k). Assuming a 7% annual growth rate, the investor will owe $10k in tax (23.8% of $40k) on the Opportunity Zone investment’s capital gain.

I already know what you are thinking, what is an Opportunity Zone?

An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation authority to the Internal Revenue Service.

Before you discard this idea of thinking these “economically-distressed” areas wouldn’t be worth investing into just to get some tax benefits let me show you some maps of these opportunity zones.

DOWNTOWN SACRAMENTO

DOWNTOWN SAN ANTONIO

DOWNTOWN CINCINNATI

DOWNTOWN CLEVELAND

DOWNTOWN MILWAUKEE

The list goes on and on but of course, you see the theme that many of these markets are very centrally located and where an investor would actually like to own some real estate for a long period of time. 

If you want to search for more areas check out the (Economic Innovation Group)

We will continue to research and vet these investment opportunities with our legal counsel and advise you to do the same. However, if you have any capital gains coming up and are interested in connecting with our research and some ideas to defer, reduce or eliminate your taxes please feel free to reach out or schedule a call with us.

Happy Investing,