REAL ESTATE INVESTORS: Qualified Opportunity Zone Tax Benefits
Updated: Aug 7
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions may be eligible for preferred tax treatment. Within the City of Houston there are more than 99 designated opportunity zones. This program was designed to entice investors to bring economic growth to areas that historically have not benefited from the spur of growth seen in more desirable communities. The areas that qualify for the tax deferment program are highlighted in purple as seen in the map provided by the City of Houston Economic Development website.
Outlined is a summarized Q & A from various websites* (see footnotes) to highlight some of the benefits of this program. You will want to make sure to consult your tax professional, Attorney or a Certified Financial Planner before making a decision to use this information to your advantage.
Why Is Tax Deferred A Benefit? Investopedia defines that Tax-deferred Status refers to investment earnings such as interest, dividends, or capital gains that accumulate tax-free until the investor takes constructive receipt of the profits. Investing in a Qualified Opportunity Fund (QOF) allows participants to claim some or all of their contributions as a deduction on their tax return. The benefit of declaring deductions in current years and incurring lower taxation in later years makes tax-deferred investments attractive.
So, How Does An Investor Benefit? Thanks to the National Association of Realtors for making this all clearer, keep reading!
1. Investors in Qualified Opportunity Zones (QOZs) can receive - both - deferral on capital gains tax on investments the profit of which is rolled over into a QOF (within 180 days of the sale to an unrelated party) as well as an exclusion from tax of up to 15% of those gains see the break down in #2.
2. For capital gains reinvested into a: (A) QOF, temporary deferral up to nine years,
(B) a 10% reduction in tax on the gain if the investor holds interest in the QOF for five years or by December 31, 2026,
(C) and an additional 5% reduction in tax if the interest in the QOF is held for seven years.
3. For future capital gains on investments accrued while "in" a Qualified Opportunity Fund (QOF):
(D) When held for at least 10 years, gains realized on investments made in connection with a deferral election (capital gains invested into a QOF on which tax is deferred ARE EXCLUDED FROM TAX (WOW!!). But keep in mind, initial gains made in connection with investments that were non-gain funds are not eligible for this benefit but you still benefit from (A), (B), and (C).
How To Become Certified as a Qualified Opportunity Fund?
An eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return. A limited liability corporation (LLC) that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a Qualified Opportunity Fund.
Do I Need To Live In An Opportunity Zone To Benefit?
No. You can get the tax benefits, even if you don't live, work or have a business in an Opportunity Zone. All you need to do is invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.
How Does The Community Benefit? Open the Houston Prospectus 2019 for more information, specifically, page 31-66 to read in detail examples of how the City of Houston is using this tax benefit to positively enhance and improve distressed areas in our city.
I hope you found this article helpful and learned another something new about how real estate can be used as a great investment vehicle. I am Courtney Johnson, a native Houstonian with a Bachelor of Science Degree in Accounting from the University of Houston Clear Lake (GO HAWKS), a Licensed Realtor, and should you be looking for residential properties for sale in the Houston and Surrounding Areas I hope you'll Contact me today!
*1 All Information, data and pictures are reserved rights to the websites from the National Association of Realtors https://www.nar.realtor/qualified-opportunity-zones/background-qualified-opportunity-zones The IRS https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions and the City of Houston https://www.houstontx.gov/ecodev/opportunity-zones_concept.html This article is intended to inform and should be verified with a tax professional, Attorney and/or Certified Financial Planner before used to act.