Qualified Opportunity Zones (QOZs) can be thought of as 1031 Exchanges on steroids. For investors looking to defer capital gains on property sales or avoid future capital gains by investing in property, QOZs are worth considering. Established by the Federal Government throughout the US, QOZs offer significant tax advantages for investors. In states like Florida, numerous QOZs provide attractive investment opportunities.
Here are the key aspects of QOZ investing:
- Investors can defer capital gains on real property they’re selling (relinquished property) when they invest the sale proceeds in a QOZ.
- Investors can also defer capital gains on non-real property sales, such as stocks and bonds.
- Investors can avoid future capital gains by purchasing property in a QOZ.
The purchase of a QOZ property must be made through a Qualified Opportunity Fund (QO Fund), which holds the title. A QO Fund is an entity, typically set up by the borrower, that can be an LLC, corporation, or partnership. The QO Fund receives its designation by filing a tax return as an independent entity and is taxed at the entity level. QO Funds are designated by the IRS filing and are self-monitored. The Fund must invest at least 90% of its assets in the QOZ.
To avoid capital gains on the relinquished property, the investor must close on the QOZ property within 180 days from the date of sale of the relinquished property.
The tax advantages include:
- If the QO Fund investment is held for 5 years or more, 10% of the capital gain is excluded from tax.
- If held for 7 years or greater, 15% is excluded from tax.
- If held for 10 years or more, the basis is increased to the fair market value of the property, and the capital gain is not taxed.
Property requirements within the QOZ include:
- New construction
- Properties vacant for 3 years prior to the purchase
- Property vacant for at least 1 year prior to a QOZ designation
- Substantially improved property, where the investor reinvests an amount equal to the value of the building within 30 months (e.g., if the purchase price is $1,000,000, with land valued at $400k and building at $600k, the investor has 30 months to invest another $600k in improving the property)
- Brownfield sites
Investing in Qualified Opportunity Zones can provide substantial tax benefits for real estate investors, allowing them to defer and potentially avoid capital gains while contributing to the development of designated areas.
Ready to take your real estate investments to new heights? Don’t miss the opportunity to discuss the specifics of your situation with attorney James Brown at New Path Title. Contact James today to receive personalized guidance and expert advice on powerful tax strategies tailored to your needs. Reach out now and secure your financial future with confidence!