Selling Investment Real Estate? Here's How To Eliminate Capital Gains Taxes with a Qualified Opportunity Zone
Most Real Estate Investors have heard of the 1031 Exchange.
Did you know there are 17 different tax minimization solutions for reducing, deferring, or completely eliminating the tax bill on the sale of a Primary Residence, Second Home, or Investment Property.
In this series of posts we will discuss the 17 Real Estate Tax Minimization Options available to you in five categories. The fourth category is the Qualified Opportunity Zone with many investment options to choose from.
Category 4: Qualified Opportunity Zone
The Qualified Opportunity Zone is an excellent tool for eliminating capital gain taxes on the sale of real estate, businesses, stocks, bonds, crypto, cars, artwork, or almost anything with a capital gain.
In short, the investor can invest their capital gains into a Qualified Opportunity Zone or QOZ to pay no tax on the sale of their investment property. In addition, the QOZ separates your basis from your capital gains. This means you can put any leftover basis in your pocket tax free. (See example below)
A Qualified Opportunity Zone does NOT require the investor to place proceeds out of escrow into a 1031 Exchange first. Instead, all funds from the asset sale go directly into the investor’s bank account. The investor then has 180 days to invest the capital gains portion of the proceeds into a Qualified Opportunity Zone.
What is a Qualified Opportunity Zone or QOZ?
In the 2017 Tax Cuts and Jobs Act, the QOZ was created to attract investment to communities that did not grow as well as the rest of the country. State Governors defined 8,700 locations across America as Opportunity Zones. This investment creates jobs in these communities, improves property values and economic opportunities. Please watch this short video overview.
A Qualified Opportunity Zone is an investment of capital gains into an Opportunity Zone that meets the qualification requirements defined in the Tax Cuts and Jobs Act. The qualifications are complex and beyond the scope of this paper, but we handle all the complexity for you so you just need to choose an investment that meets your needs.
By making a capital gains investment into a Qualified Opportunity Zone, your tax on the capital gains invested is immediately deferred. If the investment is held for 10 years and one day, all capital gains on the investment’s appreciation is tax free.
How To Invest in a QOZ?
The short version is that the capital gains from the sale of any investment can be invested into a QOZ. The asset could be a primary residence, second home, investment property, business, stocks, crypto, cars, artwork, or almost any capital gain.
Once invested, the capital is not liquid for 10 years. There are no secondary markets to sell a QOZ.
There are two ways to invest in a QOZ.
1. Invest as a pro rata investor into a Qualified Opportunity Zone Fund. The fund manager takes on all responsibility for financing, taxes, mortgage, construction, leasing, and legal requirements. The investor is a pro rata investor in the QOZ Fund and the loan is a non-recourse loan. The investor typically receives quarterly pro rata distributions from the QOZ Fund and appreciation upon sale. If the sale date is greater than 10 years and one day from the start date of the fund, all federal and state capital gains taxes are eliminated on the appreciation.
2. Hire a legal firm to create your own QOZ Fund and use your money to build your own real estate in a Qualified Opportunity Zone. This option is beyond the scope of this document, but we do have attorney’s with experience in creating these legal structures.
Example:
So what does all this mean for the average investor? Below is a real estate example to show how this solution works.
A couple living in NV, Fred and Jane, want to sell their home in NV for $900,000 and buy a new home in MI to be near their kids and grandkids. They have no loan and their basis plus 121Exemption is $700,000. This means that they have a $200,000 capital gain.
How can they sell their home, pay little or no taxes, and keep all the money working for them?
If Fred and Jane use the Qualified Opportunity Zone or QOZ, they can sell their home, put the money from escrow into their bank account and invest the $200,000 capital gains into a QOZ within180 days from the close of escrow.
This means Fred and Jane have$700,000 tax free to buy a new primary residence in MI and a $200,000 tax deferred investment.
That means that this tax year, they pay no federal income taxes and the couple has a $200,000 investment that pays income plus stays invested for 10 full years. After 10 years and one day, the property sells and the couple gets their original investment plus appreciation tax free.
If this were an investment property, the process is the same but the capital gain can also include depreciation recapture.
If you'd like to pay less in taxes, schedule a complimentary consultation with a Tax Strategist at DeferTax.com today! Call 877-829-7927 or book an appointment here…
Summary,
The Qualified Opportunity Zone is a powerful tool to leverage when the asset you are selling has a significant basis, low mortgage, and a relatively low capital gain. The QOZ is the only tool we have that separates the capital gain from the basis allowing the investor to do whatever they want with their basis, keep their basis tax free, and still pay no tax.
These are complex strategies and should be explored with the help of an expert who places your best interests first. Let’s face it, if someone has one or two options, they are not a tax strategist. They are a salesman trying to sell you their product.
We have over 40 tax minimization options on our platform. We are nationwide educators and keynote speakers on Tax Minimization. We are also real estate investors, business owners, homeowners, and high income earners. We use the strategies we recommend!
Once you pick the strategy that is right for you, we connect you with our network of vetted providers that are “best in class” in the industry. How do we know that? We use them ourselves. You can work with one of them or someone else. It is entirely up to you.
I hope you found this document informative. We have more detailed content and videos on this tax strategy at DeferTax University. Click hereto learn more.
Our exploration of tax minimization will continue with Category 5, Real Estate Income Tax Minimization in our next post.
Our website, StartAnExchange.com The easiest place on the internet to Start an Exchange, has more information and educational materials on the 1031 Exchange and more ways to save when exiting an exchange.
Our website, DeferTax.com, has more information and educational materials on over 40 tax minimization options for a primary residence, second home, investment property, business, stocks, crypto, and ordinary income tax reduction.
If you'd like to pay less in taxes, schedule a complimentary consultation with a Tax Strategist at DeferTax.com today! Call 877-829-7927 or book an appointment here…
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At DeferTax, we specialize in comprehensive Tax Strategy and Tax Planning to help you achieve Financial Freedom through effective Tax Minimization. Our team of Financial Advisors and Tax Experts is dedicated to providing tailored Tax Solutions that include Estate Planning, Investment Strategy, and Business Tax consulting. With our expertise, clients can maximize Tax Savings, enhancing their Wealth Management and paving the way to smarter Money Management.
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