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Real estate investment goes beyond the broad perception of simply purchasing landed properties for either rental or long term sales. Over the years real estate investment has undergone some changes in the economy as a whole resulting in changes in the best practices go about the real estate business.
One of such changes being the investing in opportunity act has resulted in the establishment of real estate opportunity zones and opportunity funds.
So what really are real estate opportunity zones?
Opportunity zones in the context of real estate plainly put are regions that aren’t considered to be developed or economically distressed regions. These regions are subject to tax cuts due to the investing in opportunity act established in the united states.
This law permits all neighborhoods that fall within the 25% of low-income standards of each state district to be classified as opportunity zones, a classification that they retain for ten years.
Why were the opportunity zones created?
The reason opportunity zones were created is to promote private investments in real estate while using tax incentives as the driving force to accomplish this. Private investors who invest in real estate opportunity zones gain tax incentives either immediately or in the long term.
Opportunity zones even with resemblance benefits to tax credit programs vary quite differently from it. Opportunity zones are less restrictive, less costly, and are less reliant on government agencies as opposed to tax credit programs.
Opportunity zones don’t function via tax credit programs and are instead governed through two internal revenue code sections which further removes limitations on the number of investors who can partake in the program.
What are the tax advantages of investing in opportunity zones?
The primary benefits of following all procedures and investing in real estate opportunity zones are the rewards of capital gain incentives.
This process sees investors who make investments in real estate have the opportunity to reduce tax liability on gains and even potentially receive tax-free treatment for future appreciation through their investment.
These benefits hinge on strict compliance of a timetable which sees durations to which investment profits are made.
The timetable dictates;
- Tax on original capital gain is reduced by 10% within the 5th year of the initial investment.
- Tax on original capital gain id further reduced by another 5% (15% total reduction) by year 7.
- All capital gains taxes are completed eliminated on potential profits from opportunity funds 10 years prior to the investment.
The tax advantages that come with opportunity zones, however, have timetables that influence their benefits depending on the year the investment is made.
The real estate opportunity zones initiative offers the opportunity for regional communities facing economical distress to improve. This innovation grants the opportunity for investors to drastically improve and transform these zones with benefits in the form of tax incentives if all guidelines are properly followed.