Investment in Opportunity Zones in Charlotte and across the nation is in full swing as investors rush to get capital gains invested into Qualified Opportunity Funds (QOFs) before the December 31 deadline -- when the full benefits of the incentive expire. After January 1, for QOF investments held seven years, the credit for deferred capital gains goes down to 10% (from the current 15%).
We’ve shared quite a bit on Opportunity Zones this year. As mentioned earlier, the tax savings from Opportunity Zones investment can be substantial whether you invest in an existing QOF or start your own fund. On the front end alone, you’ll receive two benefits:
- Deferral of capital gains tax until 2026;
- A 15% reduction of your capital gains tax bill if the investment is made by year-end 2019 (10% reduction if the investment is made after Jan 1, 2020).
Perhaps even more interesting is that Opportunity Zone investors are not just deferring taxes when they invest their capital gains in a QOZ; they’re acquiring an asset that can potentially increase in value. If the investor holds that investment for 10 or more years, the tax on the sale of that asset is zero. (Be sure to check your state’s rules, as several do not follow the federal guidelines on Opportunity Zone investing.)
Before you get too excited or “jump on the bandwagon” as people say, we’d like to wrap up 2019 with a few more thoughts on the subject.
First and foremost, if you’re interested in investment in OZs and just not ready yet, don’t fret. The 10% credit (that occurs after 1/1/20) is still a good deal. The last thing you want to do now is rush the decision-making process on your investment just to get those few extra points before this year’s deadline. Take your time to find the right QOF, the right zone, and the right partners, if applicable. Trust us when we say that financial regrets are some of the deepest and hardest to overcome. Don’t rush a huge financial decision like this one to save a few bucks on taxes (ever).
Second, determine if you’re really up for this commitment because not everyone is. While OZ investing can be a great way to lower your tax bill while investing in areas that need it, you need to be sure that this is what you want to do with your money for a relatively long time -- 10+ years without having total control of your money if you’ve entered into a fund or other structure that’s not 100% yours. If that makes you uneasy, OZ investing might not be for you.
Third, Opportunity Zones pop up in the most unexpected places, so do your research. An area of NYC’s trendy and booming Hell’s Kitchen, for example, has been designated an Opportunity Zone despite its mean household income of $112,000 and neighboring luxury apartments with rents as high as $8,000/mo. There’s a perception that Opportunity Zone designation only happens in low-income areas, but that’s just not the case. OZ designation depends on how each individual state wants to divide the “opportunities” for resources and development, not on the current income or housing prices in the area.
Finally, know that there are myriad ways a QOF can make qualified investments, from purchasing real estate and doing heavy rehab on it, or purchasing a parcel of land and putting a commercial building there. You could also start a local business that’s needed in a community. Just make sure the venture satisfies the test for a new business: It needs to be located in an Opportunity Zone and must derive at least 50%% of its gross income from an active trade or business conducted within that Zone.
As far as eligibility, there was some confusion initially about what businesses qualified, but new regulations make things a lot simpler. Now, businesses within a QOZ only need to meet one of these safe harbors below to satisfy the eligibility test:
- At least 50% of the services performed (based on hours) for such a business by its employees and independent contractors (and employees of independent contractors) are performed within the qualified Opportunity Zone.
- At least 50% of the services performed for the business by its employees and independent contractors (and employees of independent contractors) are performed in the QOZ, based on amounts paid for the services performed.
- Or if the tangible property of the business is in a QOZ and the management or operational functions performed for the business in the QOZ are each necessary to generate 50% of the gross income of the trade or business.
The Opportunity Zone deadline is upon us --- somewhat. Don’t let the 12/31 deadline pressure you though. Make an informed decision, not a hasty one. Remember, we’re here to help you sort things out.