Do you have excess capital gains or profit from selling an asset and want to defer or eliminate taxes on the capital gain? If so, Opportunity Zones may be worth exploring! Opportunity Zones are meant to incentivize long-term investment into targeted lower-income communities by affording real estate and business investors tax incentives for investing into these identified communities. Often, real estate can be sourced at a discount in these areas as well.
How do Opportunity Zones work? Real estate investors and business owners can receive tax deferrals, tax reductions, and even possible elimination of certain capital gains taxes when capital gains, or profits from an asset sale are reinvested into an opportunity zone.
Three main benefits to investing in these zones:
- If the investment is held for at least five years, the original capital gain owed is reduced by 10%. However, it gets more interesting than this!
- If investors keep the asset for at least ten years, they will not have to pay any capital gains tax on their investment into the opportunity zone.
- Investors can also defer paying taxes on the original capital gain until the earlier of selling the investment or December 31, 2026.
These are significant tax advantages as they allow investors to keep more capital working for themselves over the long term.
Here is an example*: Someone sells their company stock for $1 million and has $100,000 in capital gains from that sale. The investor puts the $100,000 into an opportunity zone fund that invests in a new business in an opportunity zone.
The investor can defer paying capital gains tax until they have disposed of the opportunity zone investment or December 31, 2026, whichever comes first.
If they hold the investment for five years, they can reduce the deferred capital gains tax owed on the original gain by 10%. This would mean that only $90,000 of the $100,000 gain is taxable. Assuming a 20% capital gains tax, they would owe $18,000 instead of $20,000.
And possibly the best scenario: If they continue to hold the opportunity zone investment for another five years, they will not have to pay any capital gains tax on that investment. If their $100,000 opportunity zone investment appreciates 100% over 10 years, they owe $0 in capital gains tax instead of $20,000. Investors are able to hold funds there until 2046 before needing to pay capital gains tax on the opportunity zone investment.
The same scenario is true of a real estate transaction, offering the possibility of eliminating capital gains if held for 10 years.
As always consult your accountant regarding tax questions, but contact our team for a real estate analysis to find out if you’re able to keep more of your capital working for the long term!
Current Denver area Opportunity Zones through 2028 highlighted in yellow:
- *Example is a reference from “https://oedit.colorado.gov/colorado-opportunity-zone-program”
Blog written by:
Mike Quinlan
