How To Avoid Capital Gains Taxes By Investing Into An O-Zone Property

What Is the Opportunity Zone Program?

The Opportunity Zone Program was created for the purpose of revitalizing certain economically distressed communities. And the rationale behind it is that the government knows that the private sector does a better job at managing housing and infrastructure. 

Who can invest in the Opportunity Zone(O-Zone)? 

Its applicable in the following situations: 

(a) If you have capital gains from stock sales and you do not wish to pay those taxes, you can think of investing into O-Zones. If you hold the investment for more than 10 years, the entire appreciation related to your investment in the O-Zone asset may be tax free forever. 

(b) You just sold your business or your stake in another business and you made gains there. You can avoid paying those capital gains taxes by investing into an O-Zone property. 

(c) Made gains on sale of Primary Home: If a married couple were to sell their primary home for $1,00,000 generally only the first $500,000 could be tax free if they meet the residency requirements of the primary home tax gain exclusion. They could however, invest that remaining $500,000 in an opportunity zone fund and receive the tax benefits. 

P.S: There are many more situations where an investor can be prompted to invest into an O-Zone property which is simply beyond the scope of this article. 

However, investing into an O-Zone requires 4 requirements as designated by the Tax Code. 

1) The property must be located within the government designated O-Zone area.

2) The property must be purchased after Dec 31st, 2017. For leased properties, you must enter into the lease agreement after Dec 31,2017.

3) Investor needs to make substantial improvements to the purchased property within a 30 month period. This means the owner must invest an amount that’s at least equal to the purchase price of the building. If you purchased an Ozone Duplex for $400,000 and $60,000 of purchase price was allocated to land and $320,000 was allocated to the building- you would need to put in at least $320,000 of improvement into this property. These improvements need to be done within a 30 month period. And practically speaking, this is one the more difficult requirements to meet. If you do not want to invest a large amount of time and effort into a property’s improvement, this hurdle could be hard to overcome.

4) The O-Zone property must be held by an Opportunity Zone Fund.

Q. What is an Opportunity Zone fund, anyways?

An Opportunity Zone fund is an investment vehicle set up as a legal entity. The fund must be a legal entity within the United States that files it own tax returns like S-Corps, C-Corps, partnerships or multi member LLCs. 

–         It means you wouldn’t be able to purchase a property in your personal name or in a single member LLC. 

Bottom line: When utilized correctly, opportunity-zone investments can allow an investor to reduce, defer, and potentially eliminate taxes altogether.

Useful Tips: 

• The Opportunity Zone Program can help defer and reduce all sorts of capital gains taxes—whether they’re from the sale of real estate, stocks, business interests, or even cryptocurrency. 
• The legal documents of the O-Zone Fund entity must also include a statement indicating its purpose to invest in a qualified opportunity zone property and indicating the entity’s plans to adhere to the tax and regulatory requirements. 
• I highly recommend using a new entity to act as an opportunity zone fund to hold only opportunity zone properties, not using an existing entity that holds other non-opportunity zone properties. 
• There are 2 strict deadlines for O-Zone Investments: 

(i) Mr. A has up to 180 days from the date the capital gains occurred to reinvest that money into an O-Zone Fund. Once those 180 days have passed, that gain is no longer eligible for the Ozone Tax benefits. 

(ii) Besides that Mr. A has 180 days to reinvest his capital gains in Ozone funds, the Fund itself has 180 days to purchase the property.

Q. What Happens If the O-Zone Program comes to an end in 2026? 

Unfortunately, The O-Zone program might come to an end in 2026 unless the Congress decides to extend it. 

–         A big pitfall of the Ozone is the requirement to pay taxes by the property sale date or Dec 31st 2026 which ever is earlier. This means that the investor can only defer the original capital gains taxes until 2026 regardless of whether they sell the investment or if they decide to continue holding on to the property. The key is make sure you have liquidity available to you when you need to pay the taxes! 

Opportunity Zone FAQs