Published by Forbes.com | October 5, 2021
No one can predict the future, but there are clear trajectories for certain asset classes that are undeniable.
The opportunity clock is ticking. As a critical deadline in the qualified opportunity zone program approaches on December 31, 2021, investors are finding the potential tax benefits of the program increasingly attractive — in no small part because capital gains tax rates are almost certain to go up in the weeks ahead.
Just to recap, the opportunity zone program was created as part of the Tax Cuts and Jobs Act of 2017 to incentivize private capital investments in low-income communities. Initially, investors shied away from allocating dollars to qualified opportunity funds (QOFs) due to their complexity. Over time, and with additional guidance and clarification from the IRS, the program has gained momentum — and by the end of 2020, investors had poured over $15 billion in equity into QOFs, according to Novogradac.
Now, with Congress contemplating raising capital gains taxes from 20% to 39.6%, investors are even more eager to allocate realized capital gains into tax-free vehicles. Thus, opportunity zone funds have become an attractive option for gain harvesting. While deferred capital gains ultimately pay taxes at the applicable rate at the time of realization (i.e., they will likely be greater in the future than today), the ability to pay no taxes on the “new” capital gains generated by opportunity zones investments is extremely attractive, especially given the potential future rate of 39.6%.
By investing capital gains into a QOF, investors can defer capital gains tax liability until December 31, 2026, reduce tax liability on the original gain by 10% and eliminate tax on any capital gains realized from an opportunity zone investment after a 10-year holding period.
When the basis of the investment from an investor’s original, rolled-over gain is taxed in 2026, that gain will decrease by 10% if they’ve been in the QOF for five years, making the end of this year — December 31, 2021 — the final deadline to be eligible for the 10% reduction.
For investors interested in this program, continue reading to learn about four general pieces of advice about investing in real estate through a QOF.