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Investing In Opportunity Zone Funds: What Realtors Need to Know

Deferring Capital Gains on the Sale of a Home

In 2017, the federal government created the Qualified Opportunity Zone (QOZ) program as part of the Tax Cuts and Jobs Act. These investments offer unique tax benefits to homeowners across the country, giving them a way to both defer capital gains on the sale of their home and invest in real estate that has the potential to grow tax free. Let’s take a closer look at the history of QOZs, and how realtors can leverage this program to help their clients.

Opportunity Zones: A Brief History

Opportunity zones were introduced in 2017 to encourage economic growth in distressed and underserved communities. When the program started, governors across the country were asked to identify areas with a poverty rate of at least 20 percent based on the 2010 census and designate them “opportunity zones.” In total, more than 8,700 census tracts were designated throughout the United States, District of Columbia, and U.S. territories.


Why should one consider investing in an opportunity zone?

To help drive capital to opportunity zones, the federal government grants specific tax advantages to investors. A variety of investments, including but not limited to stocks, bonds, real estate, closely held business assets, cryptocurrency, jewelry, and art, are eligible for the program if the investment aligns with the guidelines of the Tax Cuts and Jobs Act of 2017. Investors can benefit from the following tax incentives:

1- Deferral: Those who rollover their capital gains into an opportunity zone fund can defer capital gain recognition from the original investment until December 31, 2026.

2- Exclusion: Long-term investors do not have to pay tax on any appreciation of their opportunity zone investment upon its disposition, regardless of the size of the profit, if the assets in the fund are held for at least 10 years.

The original legislation offered a third incentive, which has since expired for new investors. “The amount of capital gain recognized from the original investment is reduced by 10 percent after achieving a five-year holding period, as long as that five-year holding period is achieved by December 31, 2026.”

Although investments in QOFs offer distinct tax benefits, the rules governing the Tax Cuts and Jobs Act of 2017 are complicated and somewhat restrictive. Therefore, consideration should be given to this type of investment.

What does this mean for property owners?

Anyone selling a home, including a primary residence, investment property, second or vacation home, can defer their capital gains if the gains are invested in an opportunity zone.

In addition, anyone selling a primary residence can invest gains that exceed their exclusion. *If investors have capital gains on the sale of their primary home, they may exclude up to $250,000 of the gain from their income, or up to $500,000 of the gain if they file a joint return.

How does one invest in opportunity zone funds?

Investing in an opportunity zone must be done through a qualified opportunity fund (QOF). The QOF must invest more than 90 percent of its assets in an opportunity zone, and the property held within the QOF must be significantly improved. Investors can create a fund on their own, completing improvements on the land and building, or they can opt to invest via an established opportunity zone fund.


Should clients consider investing in an opportunity zone?

To better understand whether investing in an opportunity zone is beneficial for a client, it is best to start with a conversation. One needs to understand the client’s position, income needs, and tax consequences from the sale to help identify whether an opportunity zone fund has the potential to help them achieve their short- and long-term investment goals.

Investing in a QOZ Through Perch Wealth

Perch Wealth specializes in alternative real estate investments, including opportunity zone funds.

Those looking to enjoy the potential benefits of an opportunity zone fund, but who prefer a passive investment strategy, can leverage one of the QOFs available through Perch Wealth. The Perch Wealth team has successfully assisted hundreds of clients with their investment strategies and is available to help you and your clients strategize on whether investing in opportunity zone funds would be a suitable option.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.

Opportunity Zone Disclosures
  1. Opportunity Zones (“OZ”) are speculative. OZs are newly formed entities with no operating history. There’s no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying assets is not guaranteed. Investing in OZ funds may involve higher risk than investing in other established real estate offerings.

  2. Long-term. OZ funds are illiquid and return of capital and realization of gains, if any, from an investment will generally occur only upon partial or complete disposition or refinancing of such investments.

  3. Limited secondary market. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive is typically reduced.

  4. Difficult valuation assessment. The portfolio holdings in OZ funds may be difficult to value. As such, market prices for most of a fund’s holdings will not be readily available.

  5. Default consequences. Meeting capital calls to provide pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could have adverse consequences including forfeiture of your interest in the fund.

  6. Leverage. OZ funds may use leverage in connection with investments or participate in investments with highly leveraged structures. Leverage involves a high degree of risk and increases the exposure of the investments to factors such as rising interest rates, downturns in the economy, or deterioration in the condition of the assets underlying the investments.

  7. Unregistered. The regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.

  8. Regulation. It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable to realize any tax benefits. Evaluate the merits of the underlying investment and do not solely invest in an OZ fund for any potential tax advantage.

author : Ben Carmona

Ben Carmona is a Managing Partner at Perch Wealth. With over 20 years of applied experience, Ben is an expert in real estate investments, structures, and strategies.

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