Reducing capital gains taxes with real estate

Qualified Opportunity Zone program legislation was passed in 2017 as part of the Tax Cuts and Jobs Act. This was designed to provide tax cuts to help improve economically distressed areas through investing unrealized capital gains. The tax benefits can be considerable.

Let’s say you sell a high capital gain investment property. This happens a lot with house flippers, particularly in our recent house buying craze. Maybe you have $60k in capital gains you’d ordinarily be expected to immediately pay taxes on. Now you can invest this into another property in a specified area, usually lower income urban or rural neighborhoods. You don’t need to live, work or own a business where you invest.

There are four designated Opportunity Zones in the City of Roanoke. These represent 18% of the population, or approximately 18,000 people, earning a median income of $29,000 to $78,000 (opportunitydb.com/cities/roanoke-virginia). Roanoke County and Salem have one apiece. There are more than 8,000 Opportunity Zones in the United States.

In many cases, these programs allow investments in blighted areas, or for those who prefer rosier terms, up-and-coming communities, to be tax free after ten years.

Qualified Opportunity Funds

This one doesn’t require owning real estate directly. Investment entities need to be specific for this purpose. There’s an accreditation process you need to go through to prove you’re putting in money you can afford to lose. Couples are usually required to have earned at least $300k over the past two years, or have high net worth ($1MM). Most of these Funds are security investments registered with the SEC (www.sec.gov/education/ capitalraising/building-blocks/accredited-investor).

Any type of capital gain, including long and short term, can be deferred through the Funds. Some can be eliminated completely. Usually, you have 180 days to get money from an asset sale or other gain into a Fund. Most Funds are focused on real estate development. Some of the deferral details get more complicated, including step-up basis calculations, so it makes sense to reach out to a financial advisor who understands this investment type if you’re interested. For the right situation, these can be a good strategy for tax savings and wealth building.

The upside of Opportunity Zones and Funds is potential capital gains tax reduction or elimination. The down side is the investment choices are limited and this program can tie up your money for a long time if you’re looking for maximum tax benefits. For those getting hit with high capital gains taxes, these programs are worth considering.

By Michael Shelton