Opportunity Zones

What Are Opportunity Zones and What Benefits Do They Offer?

Efforts are continually being made to improve distressed communities.

Opportunity zones are economically distressed communities where certain new investments may be eligible for preferential tax treatments.

The areas have been nominated by the state and they have been certified as Opportunity Zones by the Secretary of U.S. Treasury via the Internal Revenue Service.

The zones were added to the IRS tax code by the 2017 Tax Cuts and Job Acts were created to spur economic development and job creation in the area.

Read on to find out more about opportunity zones and how they can benefit investors and the community.

What Tax Incentives Are Available Through Opportunity Zone Investments?

There are three tax incentives available to those investing in low income communities through a qualified Opportunity Fund. These include the following.

·        Temporary Deferral of Taxes: Investors can place existing assets with accumulated capital gains into Opportunity Funds. Money placed in these funds can not be taxed until the end of 2026 or when the asset is disposed of.

·        Basis Step Up: Capital gains that are placed in Opportunity Funds for at least five years will increase by 10%. After 7 years, the profit margins increase by 15%.

·        Permanent Exclusion of Taxable Income on New Gains: Investors will not have to pay taxes on any capital gains produced through investments in Opportunity Funds that are held for at least 10 years.

Opportunity Funds can be used to finance a variety of projects including commercial and industrial real estate, infrastructure, and businesses. For real estate projects to qualify, the investment must result in the properties being substantially improved.

What Qualifies a Community as an Opportunity Zone?

Areas that are designated as Opportunity Zones have been nominated by the governors of the 50 United States and 4 territories as well as the mayor of Washington. They account for 12% of US census tracts. These zones were chosen based on their income, poverty rates and unemployment rates.

Socioeconomic factors also come into play. Home values, rents and home ownership rents are lower in Opportunity Zones. There are also more minorities and lower education levels.

Are Opportunity Zones Effective?

Opportunity zones are great for investors who can benefits from the tax incentives. However, there is a concern that it raises prices for those living in the area, essentially pricing them out. It is hopeful that the jobs created will eventually make up for this loss bringing income levels higher so that properties are more affordable.

So what do you think? Is an Opportunity Zone investment right for you?

What is a 1031 Exchange?

What is the 1031 Exchange?

If you are an investor, you are probably familiar with the term 1031. In simple terms, IRS section 1031 is a like-kind exchange or an exchange of one property for another. However, there are many tax implications and time frames involved that can make the concept a bit hard to grasp.

Read on to find out more about 1031’s, what they are and how you can use them to your advantage.

What is a 1031?

A 1031 is a property swap, but unlike most exchanges, there will be limited or no tax due during the exchange. This is because the swap will be recognized as a transaction with no capital gain. This allows your investment to grow with no tax being owed.

For example, if you bought a property for $100,000 five years ago and it now worth $250,000, if you sold it you would need to pay capital gains tax on $150,000. A 1031 exchange allows you to defer paying tax if you reinvest the $250,000 in a different property.

You can do a 1031 swap an unlimited amount of times and you can continue rolling over your profits into new investments. Although you continue to profit, you will not have to pay taxes until you decide to cash out.

At that point, it is hopeful that you will only have to pay one tax, usually 15-20%. Some lower income investors may not be taxed at all.

This is designed for investments and business properties.

The main benefit of a 1031 exchange is that, unlike buying and selling a property, the tax deferral makes it easier for you to reinvest your money.

As an investor, here are some reasons why you might want to utilize a 1031 exchange:

·        To acquire a managed property as opposed to one you will have to manage yourself.

·        To diversity assets

·        To find a property that offers a better return potential

·        To consolidate several properties into one

·        To divide a single property into several assets

·        To reset the depreciation clock

Why is Depreciation Important?

Depreciation is the cost of a property written off each year due to wear and tear. When a property is sold, the price is based on its net adjusted worth which is the original purchase price plus improvements minus depreciation.

If a property sells for more than its depreciated value, the seller may be taxed for depreciation. In this sense the depreciation will be recaptured.

Depreciation recapture increases over time but a 1031 allows you to avoid the taxes on the recapture. However, it will factor into the exchange rate of your 1031.

Qualifications for 1031 Exchange

When utilizing a 1031 exchange, you can exchange any type of property for any other. For instance, you can exchange a commercial property for a lot, or a residential property.

However, the property being exchanged must be held for investment, not resale or personal use. This usually means the property has been owned for at least two years.

To fully take advantage of all a 1031 has to offer, replacement properties should be of equal or greater value than the original property. Replacement properties must be identified within 45 days and the exchange must be completed within 180 days.

Now that you understand some basics of the 1031 exchange, what do you think? Will you be making these transactions to boost your potential income?

The above is meant as a general guide, for specific tax questions please speak to a professional accountant.