Under the Tax Cuts and Jobs Act of 2017, Congress has introduced the Opportunity Zones incentive. Multifamily investors consider this as a way to tap into advantageous tax benefits and, in turn, do their part in stimulating the growth of local economies.
What are Opportunity Zones?
As defined by the law, an opportunity zone refers to a low-income section of a larger census tract. The chief executive of a state may designate 25% of low-income communities as qualified opportunity zones or QOZs. At least 8,700 QOZs are identified across the United States and its territories.
In a bid to revitalize QOZs, the law seeks to drive private investment by offering investors a highly advantageous investment scheme in the form of a capital gains deferral.
When you decide to sell a property, taxes on capital gains are deferred and reduced when you use the amount to reinvest in Opportunity Funds. These are entities that aim to develop QOZs by way of investing in new constructions and improvements of existing buildings.
What’s the catch?
If you are able to hold on to a new investment property in an Opportunity Zone for a certain amount of time, your payment of the capital gains tax for your old property is progressively reduced. For instance, if you are able to reinvest in an Opportunity Zone fund within 180 days of selling your old property, you will get a 15% tax reduction on capital gains for that property, granting that you finalize your new investment by 2019 and hold it for a period of seven years. On the other hand, a 10% reduction on your old property is granted if you are able to finalize your new investment by 2021 and hold onto it for five years.
If you’re intent on selling an Opportunity Zone property, you can avoid paying for the capital gains tax entirely if 1). this investment was financed using profits from the sale of the previous property and 2). you hold onto the Opportunity Zone investment for more than a decade.
No doubt, this new incentive scheme will not only aid struggling communities but also provide more people a reason to invest in multifamily properties. Writing for Multifamily Executive, Cityview CEO Sean Burton notes that Opportunity Zones allow small investors to leverage “the same type of multifamily deals traditionally reserved for institutional investors.”
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