Real estate investors increasingly turn to Qualified Opportunity Zone Funds to diversify their investments. These funds are an attractive alternative to conventional investing due to their tax incentives and geographical diversification benefits.
A domestic corporation or partnership set up to invest in qualifying opportunity zone real estate is known as a qualified opportunity fund (QOF). It must keep at least 90% of its assets in real estate located in an eligible opportunity zone and self-certify every year.
The Tax Cuts and Jobs Act was passed, and real estate investors started paying attention to a new tax incentive program that encouraged investment in low-income areas. These programs are called opportunity zone funds.
These tax incentives attract real estate investors by allowing them to defer and exclude from taxable capital gains on any investments made in qualified opportunity zones. In addition, investors who invest in these funds can receive a step-up in basis on their assets when they sell them.
However, the program has some red flags that investors should know before committing to an investment. One of the biggest concerns is that the incentives may exacerbate displacement trends in underinvested communities.
Qualified opportunity zone funds (QOFs) offer a unique way to defer original capital gains taxes, which can benefit investors. The program stimulates economic growth in low-income areas nationwide and encourages private investment.
Taxpayers can roll capital gains from any asset sale – stocks, bonds, Bitcoin, and even property investments – into QOFs to reduce their tax liability or on the deal date, whichever comes first. In addition, these investments may be eligible for a step-up basis, depending on the time the asset is held before the gains are realized.
This temporary deferral has certain tax benefits for real estate investors. It can be used for any capital gain – long-term and short-term, appreciated or non-appreciated – and is an excellent addition to a diversified portfolio.
Increased Cash Flow
Investing in opportunity zone funds is an easy and tax-advantageous way to get a piece of the action. Qualified Opportunity Funds (QOFs) allow investors to reinvest capital gains from selling real estate, stock, or other assets into new investments in qualified opportunity zones.
Investors reinvesting capital gains into QOFs within 180 days of the sale can defer and reduce their capital gains taxes until they sell out of the fund – whichever comes first.
The incentive also offers the possibility of tax-free cash flow – a significant benefit for many investors. It is essential to understand the risks of this type of investment, especially given that opportunity zones are not always well-established communities with amenities and infrastructure.
The tax incentive is helping attract private equity capital into areas that have been overlooked. The trickle of investment capital flowing into opportunity zones could soon become an open fixture.
Qualified opportunity zone funds offer investors a chance to defer, reduce or eliminate taxes on capital gains. The Tax Cuts and Jobs Act created the program to spur development and job creation in economically distressed areas.
To take advantage of this federal program, a corporation or partnership must self-certify by filing IRS Form 8996 with its tax return. The investment vehicle must also hold its assets in qualified opportunity zone property.
Real estate investors should note that only capital gains are eligible for the program. Regular income, including wages, interest, and stock dividends, is not.
While there are tax incentives and increased cash flow, knowing the risks associated with investing in community development projects is essential. This is especially true when compared to investments in traditional markets.