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Learn the Tax Free Advantage of Opportunity Zone Investing
Opportunity Zone Fund Follow-Up Part 2
Good Morning -
In my last email, we took a look at the first tax benefit of Opportunity Zone Investments being:
1) The deferral of Capital Gains Tax on the sale of any appreciated asset until December 31, 2026.
The first take away is that Opp Zones allow for the deferral of ANY Capital Gains Tax until 2026. And by ANY I mean just that: ANY Capital Gains Tax generated from the sale of any asset i.e. Real Estate ( investment or personal residences), Stocks, Bonds, Art, the sale of a business (including Goodwill) etc.
It's the second major tax benefit that makes Opportunity Zones so interesting:
The completely Tax Free Distribution of Sale Proceeds when the properties within the Opportunity Zone are Sold.
Let's take a look at how the Tax Free side of the Opp Zone Equation compares with a fully taxable "traditional" investment.
Let's assume that we have two separate investments, each with a $1,000,000 Capital Gain. One investment pays the taxes due and reinvests the balance. The other invests in an Opportunity Zone Fund. To keep things fair, both investments generate the exact same rate of return.
|Tax Benefit Illustrative Comparison Chart:|
|Capital Gain Proceeds from Sale||$1,000,000|
|Long-Term Capital Gains Rate (Federal + ACA)||23.80%|
|Traditional Portfolio (simple annual return)||9.00%|
|Qualified Opportunity Zone Fund (simple annual return)||9.00%|
You can see below that both investments have a $1 million Capital Gain. And we're only going to reinvest the Capital Gain Portion of the Sale Proceeds. So $1 mill goes into a "traditional investment", and $1 mill gets invested in an Opportunity Zone Fund. But before we can invest the $1 million in the "traditional investment" we have to pay $278,000 of Capital Gains Tax. You'll note that the Capital Gains Tax for the Opportunity Zone Fund Investment is deferred, allowing for the full $1 million to be invested.
|Traditional Taxable||Opp Zone Fund|
|2019 Taxes Owed on Gain||($278,000)||$0||> Taxes on Opp Zone Deferred|
|Capital for Reinvestment||$722,000||$1,000,000|
|Pay Taxes on Deferred Gain x 85%||$0||$850,000||> Deferred Gain after 15% Step-Up|
As you see above, the original Capital Gains Tax on the $1 mill gain that went into the Opportunity Zone Fund has been deferred until 2026. You'll also see that the Capital Gains Tax is reduced by a 15% Step-Up in Basis. The Cap Gains Tax paid in 2026 (actually paid in 2027) is $236,300.
Both Investments are SOLD in 2029, with the "traditional investment" having to pay Cap Gains Tax of $317,217, bringing the total Capital Gains Tax paid on the "traditional investment" to $595,217 (remember on the "traditional investment side of the ledger, we paid Cap Gains Tax the first time in 2019 and again on the final sale in 2029. The Opp Zone Investment deferred and stepped up the Cap Gains Tax once in 2026).
|Sell Both Investments after 10 yrs|
|Total Taxes Paid||($595,217)||($236,300)|
|Ending Value Net of Taxes||$1,545,851||$2,344,126|
This is a long, drawn out example, but the bottom line is that assuming the exact same rates of return, the Opportunty Zone Fund netted $798,275 more after all taxes over the "traditional fully taxable investment".
And that my friend, is the beauty of Opportunity Zone Fund Investing! If you'd like to see current information along with all the details on a vriety of Opportunity Zone Fund Offerings, just reach out to me
Call or email me to discuss-
An Opportunity Zone Fund Recap-
In a nutshell the Act allows for a taxpayer to sell any property or highly appreciated asset, like the sale of stocks, bonds, mutual funds, investment or residential real estate, or a business and invest any portion of that capital gain into a Qualified Opportunity Fund (only an amount equal to the capital gain gets reinvested into the Opportunity Fund freeing up the balance of the sale proceeds). And by doing such, the taxpayer postpones the federal taxes on their original capital gain until the end of 2026.
AND they can also reduce the taxable portion of the original capital gains by as much as 15 percent, after seven years.
But wait there's more... investors can eliminate taxes on all capital gains on the eventual sale of the Opportunity Fund itself, if they hold that investment for 10 years.
Remember: Only the Capital Gain portion needs to be reinvested in the Opportunity Fund. The balance of the sale proceeds are not taxed and the investor can do whatever he/she pleases with those proceeds.
I'm in the Tax Deferral Business. If you or your clients are looking for relief from Capital Gains Taxes we should have a conversation on 1031 Real Estate Exchanges and Opportunity Zone Funds. Let's schedule a 10 to 15 minute call to discuss your objectives.
Don't hesitate to reach out to me to discuss your Questions/Concerns/Interest in Opportunity Zones. I'm happy to discuss & share with you details on curretly approved Opportunity Zone Fund Offerings.
Call or email me :
PS- Contact me directly for answers to Opportunity Fund Questions & to check on availability of Opprtunity Zone Investments.
PPS- If you've got a 1031 Replacement Property need we can Help.
Since 1999, I've specialized in the 1031 Real Estate Exchange Market utilizing both Single Tenant Triple Net Lease (NNN) & Delaware Statutory Trusts (DSTs) as qualifying Replacement Properties. Our reach on the NNN side is nationwide, primarily Single Tenant Retail with strong credit tenants with long term leases. We are currently reviewing some 48 different DST offerings representing all real estate classes & levered as well as all cash offerings.
Click Here for 1031 Rules, Regulations and Timelines
Looking forward to assisting you with your 1031 Exchange needs,
Senior Investment Consultant
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