For many investors, liquidating investments and realizing gain have been a challenge due to capital gains tax burdens. For this reason, most real estate investors utilize what’s called the 1031 exchange in order to defer capital gains from the sale of real estate by purchasing another real estate of equal or higher value. Although the 1031 exchange is a great approach to avoid capital gains taxes for many, for those that want to withdraw from investing into real estate, the 1031 exchange may appear like an unending cycle with the need to buy properties of greater value to avoid paying capital gain taxes.
Fast Fact: Defer, reduce, or even zero out capital gains taxes without utilizing the 1031 exchange.
However, there is another method to defer, reduce, and possibly even zero out capital gains taxes without utilizing the 1031 exchange. This new strategy allows investors to defer and reduce capital gain taxes until the year 2026 and possibly zero out capital taxes earned from investing the original capital gains if the investment is held longer than 10 years. This strategy is called the Opportunity Zone and was included in the Trump Administration’s new tax law – Tax Cuts and Jobs Act, in December 2017. It was created to provide tax benefits to those investing into various projects within the opportunity zone area with capital gains from selling their investments (i.e., stocks and mutual funds), and real estate (i.e., properties, land, and business). The benefits to investing into opportunity zones are not only for the investor but also to the location with an increased number of jobs and new businesses with the hope that the overall future of the city found in the opportunity zone will be more promising based on the number of businesses growing in the area.
For individuals that do not want to invest in a real estate property or business due to lack of management skills and/or experience of directly managing assets, there is an option to invest into various opportunity zone funds where there are investment managers who directly manage the assets between various projects found within the opportunity zone. This is a viable option for investors that may want to liquidate and real certain gains within a set period of time and want to minimize direct management as much as possible.
The opportunity zone investments can be a great solution for many investors not only for the tax benefits but for the actual investment outcome itself. However, it is important to note that not all projects found within opportunity zones will succeed bringing in the importance of consulting different options with a financial professional to gauge which projects have the best outlook and how the project’s timeline and performance suit the investor. The most exceptional benefit is that if the opportunity zone projects invested in succeeds, in addition to receiving a good return made on your investment from a fiscal standpoint, there is also great emotional joy seeing your investment leading the growth of cities.