Most real estate investors are familiar with 1031 exchanges. In short, it is when an investment property is sold, but rather than paying capital gains taxes on proceeds from the sale, an investor can purchase a similar investment property without a tax penalty. Of course there are additional rules, but that is the nutshell version.
There is now another way investors can avoid some, or all, of the tax burdens that come with the sale of investment properties: investing in the O Zone, or opportunity zone.
Sam Silverstein wrote a fantastic article in Realtor Magazine, explaining some of the specifics of this O Zone investing.
“The launch of the qualified opportunity zone program means that in return for rolling over the profits from the sale of a capital asset like real estate or company stock into certain economically disadvantaged areas, investors can delay paying capital gains taxes on those profits through 2026,” Silverstein writes. “...if an investor retains an opportunity zone investment for at least five years, 10 percent of the initial investment is excluded from being taxed. After seven years, that figure increases to 15 percent,” he continues. “A key difference is that 1031s do not allow investors to permanently exclude any portion of their profit from taxes, which the opportunity zone program allows for investments held for at least 10 years.”
So what is an opportunity zone? “To qualify as an opportunity zone, an area must either have an individual poverty rate of at least 20 percent and median family income of no more than 80 percent of the median income for the area where it is located or border an area that meets those criteria. An area designated as an opportunity zone based on its proximity to a low-income district has somewhat looser criteria: median income that is no more than 125 percent of that area’s median income. Zones are located in urban, suburban, and rural parts of the country.”
The U.S. Department of the Treasury Community Developement Financial Institutions Fund (CDFIF) page offers more details, and lists qualifying opportunity zones, as well as a map of those areas. To view the CDFIF page, click here.
To read the entire article from Realtor Magazine, click here.