Review: can you invest in opportunity zones without capital gains?

Opportunity zones were created to jumpstart economic development in low-income areas around the country. In 2018, President Trump signed the Tax Cuts and Jobs Act into law, which created opportunity zones and allows investors to defer capital gains taxes by investing in designated census tracts in the United States.

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However, some investors have trouble determining if they can invest in opportunity zones without capital gains on their investments. Is it possible to invest in opportunity zones without capital gains? It all depends on your situation, but these are the criteria you’ll need to meet before you can invest in opportunity zones without capital gains…

Opportunity Zones (OZs) were created by Congress under the Tax Cuts and Jobs Act as part of an effort to revitalize distressed communities.

To participate, investors must make an investment between $100,000 and $500,000 in one of these communities. With few exceptions (for example, investments that go toward farm property), investors cannot deduct losses from OZs. Investors have until December 31 to qualify for tax benefits associated with OZs. For more information about how OZs work, see our previous post.

To do so, they created a new type of investment vehicle – real estate investment trusts (REITs)

A REIT is essentially a real estate company for investors. The benefits of REITs are numerous, including their low cost and tax advantages. However, to qualify as a REIT, an investment must meet certain requirements. As such, if your plan is to invest in OZ investments with no upfront costs (i.e., through stock), that may be impossible without significant risk-taking – which may or may not pay off.

But REITs are typically sold on a public exchange. So how can those who don’t have $100,000 to invest buy OZ REITs?

The good news is, you don’t need $100,000 to invest. If you want to use OZ REITs as part of your wealth-building strategy, get advice from a tax professional to see how much money in alternative assets makes sense for your unique financial situation. Generally speaking, investment advisors recommend having 15%–20% of your net worth outside your home and retirement accounts as an overall goal.

Enter tax advantaged OZ Real Estate Investment Plans (ROIP). ROIPs enable investors with $5,000 or more to buy into OZ REIT investments as long as they place their assets in retirement plans such as IRAs, 401(k) accounts, SEP IRAs, etc.

OZ REITs are specifically designed to appeal to investors who aren’t wealthy enough to open a ROTH IRA or who have invested their lifetime maximums into qualified retirement plans. They have three main advantages over traditional real estate investing: leverage, tax deductions, and geographic location. Investors can finance up to 90% of their investment via bank loans with preferred rates. These loans are offered at either a fixed or floating rate of interest that is decided by each investor prior to purchase and only paid once per year.

ROIPs offer tax advantages to both investors and investors. Tax advantages include depreciation deductions, interest income, dividends and principal payments received on loans to purchase properties. These payments are not subject to ordinary income tax rates but instead are taxed at an investor’s lower long-term capital gains rate of 15% up to 20%. Both investment profits (dividends or shares of real estate value) and retirement distributions/payments from investments are also eligible for a reduced 20% long-term capital gain rate.

This benefit is available to everyone – from individual investors with limited funds, to big institutions looking for growth opportunities and high yield.

The Opportunity Zone benefit is designed to give everyone access to long-term, low-risk investments with high potential returns. It gives developers, business owners and community groups incentives to make improvements by offering a tax deferral or reduction on investments made into certain projects within designated areas in certain states (called Opportunity Zones). This area might be low income or disadvantaged communities that have been identified as eligible areas for federal tax benefits.

The conditions to designate an area as an Opportunity Zone are not complicated, however there are restrictions. An area is only eligible for consideration if it has had 20% of households below poverty levels for five years or more, or had 30% of households below poverty level in two of the last three years. It should also have limited access to transportation and other opportunities that increase employment and business development. The state government must make a recommendation to have areas designated by Congress, which is reviewed every five years.

Unfortunately, since many people don’t understand what ROIPs are – let alone their tremendous potential – many are still left out.

Many people who have read about ROIPs for years are still skeptical. I’m here to tell you that there is a simple way that almost anyone, including investors with little or no capital, can take advantage of these opportunities. In fact, if your priority is minimizing potential risks, then investing as close to local job creation as possible – and specifically within communities that are overburdened by unemployment – could be an ideal strategy for doing so.

That’s why I am providing an overview of what opportunity zone real estate investing is – and how it works.

Opportunity zone real estate investing is one of several strategies investors are using to take advantage of a special tax incentive created by Congress in December 2017. The tax incentive is called Opportunity Zones, and it could help investors grow their portfolios while making a difference at the same time. But how does Opportunity Zone investing work and what exactly are Opportunity Zones? And most importantly do all investments qualify for Opportunity Zone tax incentives or just some of them? In my review, I’ll answer these questions and more. Here’s What You Need To Know About Investing In Opportunity Zones Without Capital Gains Taxes. [And here’s] How To Invest In Real Estate In An Opportunity Zone Without Capital Gains Taxes.

Conclusion

OZ offers a great way to gain access to booming markets for those that don’t have sufficient capital (we’re looking at you millennials), but should be treated like any other investment by making sure it aligns with your overall portfolio goals. Be sure to make an appointment with a financial advisor before investing anything outside of an IRA or 401k, and do further research on your own. After all, nobody knows what market will pop next!