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With more than 25 years of proven experience in real estate tax law, Russo CPA, P.C. provides real estate tax specialist services. We navigate the challenging terrain of 1031 tax-free exchanges with ease. And we’ve successfully represented realtors in front of the IRS in passive loss rules. Even though real estate taxes are notoriously complex, we present it in a way that makes sense — one of the reasons that Robert Russo teaches income tax law at the NY Real Estate Institute
Qualified Opportunity Zones. A great opportunity.
Qualified Opportunity Zones (QOZs) can help defer — and even reduce — your tax liability on capital gains.
But, it’s complicated, like many of the tax regulations that have emerged from 2018’s Tax Cuts and Jobs Act. So, it’s absolutely essential that you consult with a very knowledgeable CPA to ensure the you’re following the proper protocol required for reaping the maximum rewards of this investment.
Since June 2019, more than 9,000 Qualified Opportunity Zones have emerged in the United States. These are low-income communities where the Federal government hopes to spark economic revival through tax breaks and incentives for investors.
How can you benefit from investing your capital gains in a Qualified Opportunity Zone? Here’s a quick overview of section 1400Z in the TCJA:
If you sell an asset before December 31st of this year, and you have a capital gain – whether it’s long or short term – and you reinvest the gain within 180 days into a Qualified Opportunity Zone, you will be able to defer taxes on that gain until 2026.
If you hold the Fund for 5 years, the gain will be reduced by 10%.
If you hold the Fund for 7 years, the gain will be reduced by 15%.
This is a simple example. If you are selling stocks or property, and you have a long-term gain of $100,000, you have 180 days to invest that into a Qualified Opportunity Zone. If you hold that investment for 5 years, you will only be taxed on 90% of your capital gain – or $90,000. If you hold your investment for 7 years, you’ll only be taxed on 85% of your gain, or $80,000.
It’s important to note that if you want to invest in a Qualified Opportunity Zone (QOZ) as an individual, you need to invest in a QOZ fund, which can then invest your money into a specific property or business within that zone.
Are there any tax benefits if I keep my investment in a Qualified Opportunity Fund for a longer period? For example, 10 years?
Yes, in fact, that’s how you can really maximize your investment. If you decide to keep your $100,000 invested in a Qualified Opportunity Zone for 10 years, you still get the benefit we outlined above: you will only be taxed on 85% of your gain.
However, if your investment into that Qualified Opportunity Zone has grown from $100,000 to $150,000? Get ready for this…you will pay ZERO taxes on that additional gain of $50,000!
How can I invest in a Qualified Opportunity Zone?
There are multiple ways you can invest: it can be in a Qualified Opportunity Zone Fund (QOZF). If you choose to invest in a QOZF, at least 90% of the fund’s assets must be invested in either property or a business operating in the designated zone.
Another option is to invest directly into Qualified Opportunity Zone real estate or businesses. You can make the investment as part of a business or partnership — but remember if you are investing as an individual you must go through a QOZ fund.
If I purchase land and an existing building in a QOZ, would that yield the tax benefits mentioned above?
Yes, but remember you are investing in a low-income area. In most cases, the buildings are in need of renovations and there are strict guidelines to follow to receive the maximum tax benefits.
Here’s an example. Let’s say your business wants to invest $500,000 in a QOZ by purchasing land and an old factory building. The value of the land is $300,000. The building is worth $200,000. In order to qualify as an QOZ, your renovations must meet or exceed the value of the building – which is $200,000 in this instance. You don’t need to make upgrades to the land.
Are there down sides to the Qualified Opportunity Zone tax opportunities?
Let’s fast forward to 2026, when it comes time to pay your taxes on that capital gain you acquired several years back. Four years from now, a new congress will decide on the tax rates. What if they change the capital gain rates? Unless there’s a grandfather clause, your capital gains may be taxed at a higher rate — or lower, if you’re an optimist.
How can I get started?
As mentioned earlier, it’s imperative to consult now with a qualified CPA. You can always reach out to our team at Russo CPA, P.C. And don’t wait until the end of the year because now is the time to calculate what capital gains you may be coming into this year.
After you have a plan in place, find a Qualified Opportunity Zone using this interactive map. Many people find it very rewarding to know they’re investing in their local community, although you are able to invest in any of the 9,000 Qualified Opportunity Zones throughout the U.S.