Certain properties in what are called opportunity zones provide real estate investors with additional tax benefits.
Opportunity zones were created under the Tax Cuts and Jobs Act. Opportunity zones spur economic development and job creation in distressed communities by providing tax incentives for investing in businesses operating in those zones.
There are more than 8,700 opportunity zones in the United States and nearly 130 in Colorado. In a recent report sent to the White House about opportunity zones, revitalization projects have delivered economic and social benefits to 52 million Americans living in economically distressed communities, including 35 million people in opportunity zones.
According to the Internal Revenue Service, an investor can defer tax on any prior eligible gain to the extent a corresponding amount is timely invested in a qualified opportunity fund (QOF). The deferral lasts until the earlier of the date on which the investment in the QOF is sold or exchanged or Dec. 31, 2026.
If the QOF investment is held for at least five years, there’s a 10 percent exclusion of the deferred gain. If the investment is held at least seven years, the exclusion increases to 15 percent. In addition, the amount of eligible gain is decreased to the extent the amount deferred exceeds the fair market value of the investment in the QOF.
If the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an adjustment in the basis of the QOF investment to its fair market value on the date the QOF investment is sold or exchanged. As a result of this basis adjustment, the appreciation in the QOF investment is never taxed. A similar rule applies to exclude the QOF investor’s share of gain and loss from sales of QOF assets.
As is the case with many government programs, they can be complicated and tend to change from time to time. Check with your accountant and other professionals to see if investing in an opportunity zone could be right for you.