Opportunity Zone Tax Benefits! Holy Cow!

If your state is listed as an Opportunity Zone you could stand to make some pretty cool investments in 2018. Will this be a tax haven or nightmare? Only time will tell!

So, I was driving in my car the other day listening to one of my favorite podcasts, Bigger Pockets.  One of the guests, Amanda Han, CPA from Keystone CPA, dropped a tax tip so big I almost drove my car into a bridge embankment!

Written into the tax code on December 22, 2017 via The Tax Cuts & Jobs Act, Opportunity Zones were added to spur economic development.  What’s the big deal? This sounds really boring, right? Wrong!Opportunity zones are economically-distressed communities where new investments may be eligible for preferential tax treatment. What’s the treatment?

Here’s an example:

Tom tax payer bought 500 shares of ABC stock for $90 per share over 25 years ago.  ABC went through tons of growth & last year – multiple stock splits. Tom now owns 22,000 shares worth $35 per share.  Here’s the math:

Tax basis: 500 x 90 = $45,000

Current value: 22,000 x $35 =$770,000.

Not bad, right? Tom’s problem right now though is a little something called capital gains.  Basically, if he were to sell this stock, he would have to report $725,000 in capital gains. This would create a federal tax liability at 15% or $108,750.  Yeah, he’s had a big gain – but who wants to pay that? Short of dying or gifting the money to a qualified charity – Tom’s only option really is to pay the tax.

That is until he hears about the Opportunity Zone. Tom’s lucky enough to live in an area where he decides to use his stock to purchase an apartment building with his highly appreciated stock.  From the IRS:

“investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged.”

What does this mean? Tom could potentially defer that massive capital gains tax issue & as long as he keeps the property for 10 years – the IRS will increase the basis of stock sell to the fair market value of the investment!! That means if this Opportunity Zone does well & Tom bought the property for $770,000 & it’s now worth $2,000,000 – he can walk out with all of that money TAX FREE!!! Wow!

As always, don’t take my word for it – check out these resources from the IRS & then chat with your local tax pro for personalized guidance.

https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

For those of you seeking a more technical version – the full IRS publication can be found here: https://www.irs.gov/pub/irs-drop/rp-18-16.pdf

Want to know where these zones will be? This list is current as of May 17, 2018. https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

About the Author

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Joseph A. Davis, EA, CDFA®

Director

With over 13 years in the financial services industry, Joe knows his stuff. Cursed with the desire to be a serial entrepreneur - Joe is a real estate investor & managing partner for Davis Financial LLC, Utah Divorce Services and Tax Smart Pros. He most recently became the director for Find a CPA Today. Joe is an Enrolled Agent, EA, & CDFA®. He also holds FINRA licenses 7, 66 & 24. When Joe isn't trading, looking for new real estate investments or obsessing over his work - you can find him at home, playing with his children & probably mowing his lawn.

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