Tax Benefit of Opportunity Zones
OK, you’ve flipped a property for a nice profit, but now you are faced with a tax bill on the gain. The 2017 Tax Cuts and Jobs Act gives you a new way to shelter that profit from the IRS. The Act created Opportunity Zones, which are designated economically-distressed communities where investments can earn a preferred tax treatment. A Qualified Opportunity Fund (QOF) is a pool of eligible properties located in Opportunity Zones, and these funds unlock the tax benefits to investors. Check out this map to see what’s available in your area.
This is how it works. If you score a gain from the sale of a property (which we’ll call the original investment), you can invest the gain in a QOF within 180 days to defer the tax on the gain. The period of deferral is the earlier of the sale of your QOF investment and December 31, 2026. If you hold your QOF investment long enough, you are forgiven some taxes on the gain you earned from the sale of the original investment, as well as possible tax forgiveness on profits you earn on your QOF investment.
The amount of tax benefit is tied to the holding period of your QOF investment. You receive a tax deferral but no tax reduction during the first five years. However, if you hold the QOF investment five years or longer, you get the following tax reductions:
|QOF Holding Period||Benefit|
|Less than five years||Deferral of tax on original capital gain|
|Five to less than seven years||10% reduction of original investment’s taxable gain|
|Seven or more years||15% reduction of original investment’s taxable gain|
|More than 10 years||100% forgiveness of QOF profit|
In other words, if you hold your QOF investment for more than 10 years, your cost basis in the fund is stepped up at the time of sale such that you owe no capital gains tax on any QOF profitearned afterQOF investment. A QOF holding period of between five and less than seven years reduces by 10% the taxable amount from the original investment’s capital gain, and you save 15% for holding periods of at least seven years.
House flipping can be quite lucrative when you know what you’re doing. Investing some of your gains in an Opportunity Fund is a good way to defer your current taxes and reduce your future taxes.