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The essence of opportunity funds for real estate is that it is a distressed rural or urban community that fits the qualifications of the local, state, or federal government. Localities that qualify as Opportunity Zones have to be qualified by the state’s designation. The capital gains or tax treatment programs offer unique tax benefits.
Tax benefits of Opportunity Funds
Temporary capital gains
The first tax benefit that investors enjoy is a temporary deferral of the taxable income. The deferral is applicable for capital gains that are a reinvestment of the Opportunity Fund.
Improvement of the capital gains
The second tax benefits investors enjoy the basis of capital gains. It is vital to note that the basis increase by at least ten percent when the investor holds the account for a minimum of five years. An investment that holds its position for at least seven years gains additional basis percentages by at least five percent. The continual additions help investors exclude the fifteen percent that would otherwise be present in the original taxation program.
Investors who hold their initial investment for at least ten years earn a permanent exemption from taxes. You should however, note that the exclusion is only applicable to gains from investments of the Qualified Opportunity Zone.
The above details mean that a $500,000 capital gain of the traditional asset will give the investor a $119,000 tax reduction. The investor could earn additional capital gains as per the indicated percentages. The final amount depends on several factors:
- The state’s tax law
- The current filing status
- The basic income
- The overall return from the Opportunity Zone
- Length of the investment
How do the 1031 Exchange and Opportunity Funds tax benefits compare?
Savvy real estate investors use either of the programs and still earn practical tax benefits. Opportunity Funds have a strategic plan to offer long-term benefits on long-term investments. It also allows investors to direct unused capital gains into other areas of investment. The investors have an eighty-five percent taxation on the original investment, and a better offer for a long term investment.
Do you need to live in an Opportunity Zone to gain tax benefits?
You can receive tax benefits if you work, live, or have a real estate business in an Opportunity Zone. The only requirement is that your property qualifies for the standards of Opportunity Funds real estate assets.
What are the most important considerations before investing?
Investors ought to be very careful about making investments based solely on tax benefits. They can use the following standards to ensure the real estate will fetch the right tax benefits:
- The investment should be good enough to generate excellent benefits outside Opportunity Zones.
- Choose a group with a good reputation in Opportunity Zone investments.
- Be aware of the compliance regulations that attribute this type of investment.
- Partner with tax advisors who will offer insight about regulations that are not clear from the IRS
Galena Equity Partners has several complete residential projects. We understand the dynamics that define a successful and offer Opportunity Funds real estate with the best taxation conditions. Contact us today for more information on how we can help you make the most significant leap into financial freedom.