How do you get money into areas and markets that have been dry of capital for so long? Why do you need capital in a neighborhood anyway?
Is money the solution to all problems?
Is money the root of all evil?
To get a little philosophical, isn’t money just a simple and easily exchanged form of energy? You perform an act, like working or investing or providing a product, and you receive payment for that energy you transferred in the form of money. It makes things nice and easy.
So with responsible use of money comes the accumulation of wealth, and capital. And with the deployment of capital and the responsible management of assets, comes PROFIT. And profit is exciting. But profits are not always harvested because of the tax burden that comes with harvesting profits.
Imagine if you bought 5 apartment buildings back in the 1980’s, you have already paid the debt off on these buildings and are likely not getting much deduction for depreciation. You are fine with the income these buildings bring you but are ready to sell, and redeploy that capital into something potentially more efficient.
Unlike the 1031 Tax Exchange the TCJA allows any capital gains, from any asset class, to be harvested and put into an Opportunity Fund
The Tax Cuts and Jobs Act of 2017 established the Opportunity Zone program to create investment models that would encourage private investors to transfer their unrealized capital gains into funds that support the development of low-income areas across the country.
When the TCJA went into effect, investors and fund management firms scrambled for a year to learn and understand what had just been created, and counties were giving the opportunity to designate their opportunity zones. Essentially outlining which parts of the community would benefit most from this type of capital incentive. Counties across the United States mapped out their opportunity zones, and just not are the investors and fund managers figuring out how to play this game.
- Defer taxes on capital gains reinvested in a Qualified Opportunity Fund until December 31, 2026 or the date on which the Opportunity Zone investment is disposed of, whichever is earlier.
- Reduce the amount of deferred taxes owed by up to 15%. The basis for capital gains reinvested in a Qualified Opportunity Fund is increased by 10% if the Opportunity Zone investment is held for at least five years, and by an additional 5% if held for at least seven years; as such, the amount of deferred taxes can be reduced by up to 15%.
- Eliminate tax on capital gains from the Qualified Opportunity Fund investment if it is held for at least 10 years.
Further, to realize the full incentives of the program, the opportunity fund must invest an equitable amount into the property over what was paid for it. This keeps slumlord style holds from overrunning the market to exploit the tax incentive.
The present time value of money and opportunity for sizable reduction, if not full elimination of capital gains taxes offer investors a handsome opportunity to impact a community and bolster return.
Contact Honey Bee for more information on Opportunity Zones in the Dallas / Fort Worth metroplex.
Honey Bee Properties LLC