Protecting the O-Zone: Insight into the Greatest Tax Break You’ve Never Heard Of
September 05, 2018 | BY Spencer Diamond
When the word “tax shelter” comes to mind, many of us think of a locale such as the Cayman Islands, Switzerland, or Apple’s own Ireland. While many of those countries do offer enticing tax benefits, a recent piece of legislation has clandestinely spurred one of the most significant tax incentives in modern history, with no international accountant required. Called the Investing in Opportunity Act, this bipartisan law was launched over a process of more than 10 years, started by tech mogul Sean Parker, all with the aim of helping America’s most under-performing and neglected cities. Quickly catching the attention of Democratic Senator Corey Booker, along with many of his colleagues from both Houses of Congress, the Bill was officially signed into law in December 2017, which most tax professionals equate with the Tax Cuts & Jobs Act.
The way in which the bill works to a client’s benefit is in many ways reminiscent of a 20th Century tax shelter, especially in that the venture is most successful when implemented as a Limited Partnership. Essentially, the bill is engineered to corporations, wealthy individuals, and investment institutions who have recently realized capital gains, and are looking to defer (or in some instances eliminate) those tax liabilities. First, investors who have sold an asset at a gain have 180 days (roughly six months) to reinvest the capital into an Opportunity Zone. What is an “Opportunity Zone”? An Opportunity Zone, termed O-Zone, is any city which is designated by the government with 20% or greater poverty rates or a median household income less than 80% of the neighboring areas. Once the investor places the capital into an O-Zone fund, which must have a minimum of 90 percent of its assets in O-Zone projects, the original capital gain isn’t due until 2026. When the investor pays the original capital gains tax in 2026, he is given a 15% tax cut on whatever the liability is.
Further, after the O-Zone investment is sold (provided it is sold after 10 years), any gains realized are tax-free. Yes, tax-free. Other than several articles by Forbes Magazine, this law has gotten minimal attention from experts and newspapers alike, but, especially in states such as New York and California, this law can prove to be a tremendous tax planning device as the industry races to find ways to offset the increased tax burdens for many clients.
Where are these O-Zones located?
While many are in the rural communities that make up the majority of the local economic crises, it is surprising to see just how many of them are within striking distance of our desktops. In fact, in the national Opportunity Zone database, there are currently 83 located in Brooklyn alone, with dozens more in the Bronx, Queens, and Nassau Counties. Of course, no strategy is universally successful, but wouldn’t this law be useful to many clients, eager to invest in real estate, but afraid of the tax consequences? Since this law is truly a new concept, the IRS has not released the final regulations pertaining to it, which means that now is the time to keep up with the rulings and updates, gaining the knowledge to help clients in truly expert standards.
real estate - tax - tax shelter