By Scott Wohlers
Scott Wohlers is Vice President at Riverplace Capital Management in Jacksonville, Florida, a private independent wealth management firm that has been serving clients locally and nationally for more than 20 years.
A relatively new area for tax protection that has stimulated some interest and excitement amongst investors is something called Opportunity Zones. If you have recently incurred capital gains and are interested in deferring, reducing or eliminating those gains, you may benefit from investing in an Opportunity Zone.
Opportunity Zones were created as a portion of the Tax Cuts and Jobs Act passed in December 2017. The purpose of Opportunity Zones is to encourage investment in low-income areas to help increase employment, stimulate the local economy and create an overall improved quality of life. Opportunity Zone investing from the new act creates three types of tax benefits for investors. First, a deferral of capital gains until December 31, 2026; second, a potential for partial forgiveness of capital gain depending on when the investment into the Opportunity Zone investment is made; and lastly, if the investment is held for more than ten years there is no tax paid on future gains. The initial perception was that Opportunity Zone investing was just about commercial real estate investing. However, this is not the case at all!
So, what are Opportunity Zones and how do they work? In March 2018, the Governor of each state and US Territory was responsible for nominating different areas of their state that fell within the bottom 20% of income relative to the national average. The zones have already been selected, with over 8,700 census tracts nationally and 427 tracts in Florida alone. A map of Florida Opportunity Zones is included for your information. You can go online and view the zones in your area by visiting the Treasury Department’s website. In Jacksonville two areas that you may be familiar with include St. Nicholas and Lakeshore as well as some locations in Mayport, Atlantic Beach, and Yulee.
Opportunity Zone investing is very limited in scope; only those individuals (including trusts and estates), corporations or partnerships that have recently incurred a large capital gain can benefit. Before Opportunity Zones, the only way to defer paying Capital Gains taxes was to own a rental/investment property, sell it for a profit, and then roll the gains into similar property through a 1031 Exchange. This is not the case for Opportunity Zone investing; any capital gain incurred can be deferred and real estate is not the only investment vehicle available through Opportunity Zone investing.
Investors who incur a gain, whether from the sale of a business, highly appreciated stock, or the sale of property, must invest their gains in Opportunity Funds within 180 days of realizing the gain to qualify for the tax incentives. The Opportunity Fund is the centerpiece of Opportunity Zone investing because capital from the fund will be deployed into the investment vehicle within an Opportunity Zone. The investor must create a Corporation (or an LLC filing as a Corporation) or a Partnership (General or Limited) that will hold the fund. The investor self-certifies with the IRS that the funds under the Corporation or Partnership are indeed an Opportunity Fund. The investor then has 30 months to deploy the capitol into an investment within an opportunity zone.
An investor can buy shares of stock for a domestic company that operates primarily within an Opportunity Zone, purchase a business itself that operates primarily within an Opportunity Zone, or buy land/real estate within an Opportunity Zone. If an investor buys land or property, they must substantially improve the property within 30 months. For example, if you buy a warehouse for $1 million you would have to invest an additional $1 million in the property itself. If you are buying land, you still have the same improvement requirements, however, by adding any type of building on the property you meet the improvement requirements. If you buy a business or buy stock in a business operating within an Opportunity Zone, 70% of the tangible business assets must be located in an Opportunity Zone. There are also some businesses, including establishments whose primary income comes from the sale of alcohol or alcoholic beverages, that do not qualify. It is important to make sure you are investing in a qualifying business.
There are several tax benefits, and depending on when, and for how long you hold the investment, they may vary. There are three potential tax incentives; deferral of initial capital gains tax, potential partial forgiveness of the original capital gain, and no capital gain tax on the appreciation upon sale. For example, if an investor who incurred a capital gain in 2019, created an Opportunity Fund and invested the gain into that fund, they would see their capital gains forgiven 15% when they pay taxes for 2026. If they invest in an Opportunity Fund by the end of 2021, they will see a reduction in their initial capital gain by 10% when they are due. If that same investor holds onto their investment within the Opportunity Zone for ten years, they wouldn’t have to pay any capital gains if they sold the property/business for a profit.
Riverplace Capital has financial expertise in Opportunity Zones and can provide a consultation or presentation upon request. For more information contact us at (904)346-3460 or www.riverplacecapital.com
Riverplace Capital is not a CPA or Tax Law firm; for specific tax advice consult your CPA or Tax Attorney.
This article originally appeared in The Florida Star.
