let’s talk : OPPORTUNITY ZONES

Good morning!

Over the past week my partners and I have spent quite a bit of time discussing the new Opportunity Zone Program. This concept was originally introduced back in 2015 by the Economic Innovation Group. It was recently adopted by Congress as part of the recent Tax Cuts and Jobs Act. Essentially, the new tax bill is outlining a set of “Opportunity Zones” (low-income communities) where one can invest in Qualified Opportunity Funds in exchange for SERIOUS tax incentives. Serious, as in, you could earn tax- free gains. This is no joke. I’ll explain what we have learned so far below.

So, as we do, let’s talk real estate, let’s talk OPPORTUNITY ZONES…

FIRST THINGS FIRST – WHAT IS THE OPPORTUNITY ZONE PROGRAM?
“A new national community investment program that connects private capital with low-income communities across America.”

TELL ME MORE
This program was enacted by Congress as part of the new tax bill to encourage long-term investments in low-income communities. The bill encourages investment in low-income areas by providing BIG tax breaks for investors. I mean BIG – you could essentially invest any unrealized capital gains into one of these funds and see TAX-FREE or TAXED- LESS gains (if done “correctly”). I repeat, you could earn TAX-FREE MONEY.

THE PROGRAM OFFERS THREE DIFFERENT TAX INCENTIVES

(1)Temporary Deferral

Definition : “A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.”

My Interpretation : If you invest unrealized capital gains into an opportunity zone, you will defer any taxes on this original investment until you dispose of your investment (or until 12/31/2026 – whichever comes first).

Give me an example : Lindsey has $100 of unrealized capital gains in her stock portfolio, so she decides to invest that $100 in an Opportunity Zone near and dear to her heart – the Southern Tier of NY (hello Binghamton). She decides to hold that $100 in the O-Zone fund for less than 5 years.

Not to be selfish, but what does she get out of this?

  1. She defers any taxes she would have paid on that $100 until date of disposal.

(2) Step-up In Basis

Definition : “A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.”

My Interpretation : You get a 10% tax break on the unrealized capital gains that you had invested if you hold the Opportunity Zone investment for 5 years. If you hold it for 7 years, this 10% increases to 15%. AKA 15% of your original invested money is now TAX FREE people.

Give me an example : Lindsey has $100 of unrealized capital gains in her stock portfolio, so she decides to invest that $100 in an Opportunity Zone near and dear to her heart – the Southern Tier of NY (hello Binghamton). She decides to hold that $100 in the O-Zone fund for 7 years.

And, what happens if she does this?

  1. She defers any taxes she would have paid on that $100 until 2026; and
  2. Since she left the money in the fund for 7 years, she is entitled to the 15% step-up basis. This means of that original $100 Lindsey had invested – only $85 is still taxable. So come 2026 when Lindsey goes to pay taxes on the $100 of unrealized capital gains she had invested into the O-Zone, she will only owe 23.8% (capital gains tax) of $85,the other $15 she had invested is now tax free.

(3) Permanent Exclusion

Definition : “A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.”

My Interpretation : THIS IS THE TRUE DEAL. If you hold onto your Opportunity Zone investment for 10 years, you are eligible for the tax deferral, step-up basis, AND your gains here are TAX FREE.

Give me an example : Lindsey has $100 of unrealized capital gains in her stock portfolio, so she decides to invest that $100 in an Opportunity Zone near and dear to her heart – the Southern Tier of NY (hello Binghamton). She decides to hold that $100 in the O-Zone fund for 10 years.

10 years kind of seems like a long time – what kind of tax incentives are we talking here?

  1. She defers any taxes she would have paid on the $100 out to 2026;
  2. She left the money in the fund for 7+ years, so she is entitled to the 15% step-up basis. This means of that original $100 Lindsey had invested – only $85 is still taxable. So come 2026 when Lindsey goes to pay taxes on the $100 of unrealized capital gains she had invested into the O-Zone, she will only owe 23.8% (capital gains tax) of $85,the other $15 she had invested is now tax free; AND…
  3. Since she kept the $100 investment in the O-Fund for at least 10 years she does not have to pay taxes on any appreciation gained through the fund. So let’s say the fund appreciated at a steady rate over the 10 years and is now worth $80 more than it was 10 years ago. That $80 gain is tax free. Show me the $$$.

WHERE ARE THESE OPPORTUNITY ZONES?
Final zones are still under discussion. States were to submit their proposed zones by 3/21/18, however several states requested a 30-day extension (including New York).

Click HERE to see a map of the potential opportunity zones.

HELP ME, HELP YOU (really just help me please – but only if you want to)
As some of you may know, my partners and I have been working to build a rental portfolio up in the Binghamton, NY area. Our goal is to provide safe and affordable housing for students and residents in the region. Lucky for us- the Southern Tier of NY (aka home to Binghamton, NY) has been nominated as an Opportunity Zone -woo! But nothing is official yet, SO this is where we could use your help! By just quickly filling out the form HERE & voting for the “Southern Tier” region(only if you too believe in the re-birth of this area, I am by NO means trying to force you to do this if you don’t want to) you can help us further make a case as to why the Southern Tier should be deemed an Opportunity Zone. In our minds, we think it is a GREAT area, on its way to a huge REVITALIZATION – it’s just in need of a little TLC.

Feel free to comment below and let us know what YOU think!

Happy Wednesday!

-Erin

All data and information provided in this email is for informational purposes only. This email makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.

Data Sources for today’s content:

http://eig.org/opportunityzones

http://eig.org/wp-content/uploads/2018/02/Opportunity-Zones-Fact-Sheet.pdf

https://www.policymap.com/maps

https://docs.google.com/forms/d/e/1FAIpQLScugcFY8h7OEATeatxH7WHrqFbMmseAx_4XK2vHrJSzUq5PoA/viewform

 

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