By combining a Cost Segregation Study with an Opportunity Zone Fund investment, you have the potential to lower your tax burden considerably. Find out How!
Investors who want to defer and reduce capital gains are finding success with opportunity zone funds.
What is a Qualified Opportunity Zone?
Qualified Opportunity Zones are areas that the IRS has designated as distressed. This designation offers specific tax benefits for those who want to invest in the property in these distressed areas. In addition, it will incentivize investors to give the distressed area an economic boost. Currently, there are over 8,000 Qualified Opportunity Zones across the U.S. and its territories.
What is an Opportunity Zone Fund?
An Opportunity Zone Fund is the vehicle that is used to invest in Qualified Opportunity Zones. Even though all Opportunity Zone Funds are started with the same goals, they won’t all produce the same outcomes. And, as investments, they still come with risks. Each Opportunity Zone Fund will have its own
· Investment Strategy
· Risk Profile
Some involve developing a single property. Others involve more complicated development across several zones. Always research the potential risks of investing in a particular opportunity zone fund.
Opportunity Zone Funds provide capital gains benefits, especially for those who invest before December 31, 2021.
What Are the Tax Benefits of an Opportunity Zone Fund Investment?
The 2017 Tax Cuts and Jobs Act enable investors with capital gains and qualified 1231 gains to invest those gains into an Opportunity Zone Fund to defer the gain. This investment must be made within 180 days of realizing the gain to qualify. Once an investor has done this, they can defer their gains until December 31, 2026.
Investors can reduce the taxable capital gains on their investment in the fund if they keep it in the fund for a certain period. For example, investments held for five years will receive a 10% step-up, reducing the capital gains. If they keep the investment for seven years, the step-up is raised to 15%. Once the deferral ends, they would pay capital gains on the difference.
Investors can also eliminate capital gains on the appreciation of the investment if they hold the Opportunity Zone Investment for ten years. With all these benefits, it is no wonder investors are flocking to OZF. But it isn’t as simple as it sounds.
One requirement for the Opportunity Zone Fund is to improve the property so that the improvements’ cost exceeds the building’s tax basis when the OZF acquired the property. Because of this requirement, OZFs work exceptionally well for substantial rehabs of existing buildings or new construction projects, but not for simply acquiring stabilized real estate.
How Cost Segregation Can Help Meet this Requirement
Because the substantial improvement test only applies to the buildings on the site and not personal property, land improvements, or land. It can be beneficial to do a cost segregation study when acquiring the property. A Cost Segregation Study can lower the building basis, thereby lowering the required capital expenditures to meet the substantial improvement test.
Cost Segregation is already a great way to free up capital that is locked up in your buildings. By combining a Cost Segregation Study with an Opportunity Zone Fund investment, you have the potential to lower your tax burden considerably. Find out more by talking to your tax professional.
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