At Centennial, we have been talking about Opportunity Zones non-stop for the past few years. Why? Because they are an amazing opportunity! You don’t need to already be a real estate investor to utilize one either, meaning you can purchase into one from many types of capital gains.
So, what is it? An Opportunity Zone conveys tax advantages to investors who take the proceeds of a capital gain, like the sale of a stock or a business, and invest them through a fund into a qualifying project in a designated zone. This program was designed to encourage new economic activity in “left-behind” places. OZs promise a positive impact on the area’s employment and establishment growth.
What is the incentive for investors? The three major benefits for OZ investors are:
- A temporary capital gains tax deferral (through Dec 31, 2026). Such gains must remain a part of a Qualified OZ Fund.
- A 10% tax reduction on the original amount of capital gains when the OZ investment is held for 5 years.
- Full tax exemption as long as the investment is held for at least 10 years. All appreciation that accrues tax-free!
What qualifies as an OZ property?
The property must be within a designated zone and be of the property’s “original use.” For example, buying a newly constructed building before it is leased to any tenants. There are standards set by the IRS regarding the property being placed into service, readiness, and capable of performing its intended function. See below for a full chart explaining these standards.
The reason these are becoming preferred to a traditional, like-kind 1031 Exchange is because it allows a quicker path to liquidity and a flexibility in the types of assets.
If you have recently incurred a major capital gain, an Opportunity Zone investment would allow you to build lifelong wealth tax free. Check out our library of OZ webinars that go in depth regarding the steps, policies, and how to find a qualified property.