If you have recently had any type of capital gain event….

If you appreciate tax efficiency…

If you believe real estate values generally increase over time….

If you are interested in how all of this can dovetail with socially responsible investment…

It may be worth your time to look seriously at Opportunity Zones, especially now during tax planning season.

Opportunity Zone tax benefits summarized:

  • Any capital gain from any asset type is eligible. Stocks, gold, crypto, real estate, partnership sales, anything. Short term and long term.
  • Only the gain or a portion of the gain needs to be invested. Your original basis can be used for any other purpose. You get that money back tax-free, no strings.
  • You can defer payment of the capital gain tax until 2026 and possibly 2028.
  • Capital gain tax payment will be reduced by 10%.
  • Profit on the new investment will be tax free if the asset is sold after 10 years. And depreciation is not recaptured.
    • Note, the tax benefits apply to federal and most states. Not all states are conforming. California is currently not conforming.
    • Also note, there is no penalty for selling an Opportunity Zone project or your interest in a project before ten years are up.

With few exceptions, almost by definition, investing in an OZ project is an investment in a marginalized, under-developed neighborhood. Certain areas of San Jose and Oakland are examples of where new investment could have positive community impact and also solid  economic returns. These markets are among the most compelling Opportunity Zone areas in the nation along with parts of Los Angeles and San Diego.

If you are seriously interested in considering an Opportunity Zone investment, a key first step is to determine the timing and nature your capital gain event. The IRS generally gives a taxpayer 180 days to place money in a Qualify Opportunity Fund, beginning on the day of the capital gain event. But that date can vary depending on the circumstance surrounding a taxpayer’s access to the capital gain funds. For example, if you personally sell stock, your clock will start ticking on the day the trade settled. Whereas if you were part of partnership that sold, your clock will start ticking when partnership files its taxes. Assume a partnership was sold in 2020, and that partnership files its taxes in March 2021, then a member of the partnership would have until September 2021 to make an OZ investment.

Because of COVID, many of the 2020 deadlines have been extended into 2021. So capital gains that were realized in 2019 may still be eligible. If interested, consult with your tax advisor to determine your eligibility.

The regulations are still basically brand new – they were passed in December 2017 and the IRS has been providing updated guidance continuously since then. Your trusted tax advisor may not be fully up to speed. They may still be the best place to start your inquiry; but you may also consider getting a second professional opinion.

About the Author

John Churchward is a Managing Director with Marwood Company, a real estate investment and development company based in San Jose. John has a diverse background working professionally in commercial real estate as lender, advisor and principal. John earned his Bachelor’s degree in Engineering from Brown University where he played Varsity Hockey and Crew.

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