Opportunity zones offer big tax savings if you’re planning on owning rental properties long-term. They were designed to be a lucrative strategy to revitalize distressed communities through private investments. Opportunity zones have similar benefits to a 1031 Exchange, but with the added advantage of tax-free gains on the new property if you hold for at least 10 years.
Before you jump in, there are a few things to be aware of. Let’s start by comparing the 1031 exchange process with opportunity zones.
Sale and Purchase
With a 1031 exchange, you must sell rental properties and purchase like-kind rental properties . With opportunity zones, however, you can sell a rental property, stocks, or a business and put any of it into an opportunity zone fund which then can purchase rental properties.
In a 1031 exchange, timing is important. You only get 45 days from the sale of the property to identify the new properties. You only get 180 days from the sale date to close on the new properties. With this strategy you must set up the new property prior to selling. This allows you to defer paying taxes on that gain if you operate within the guidelines. If you don’t buy another property within the given time limit, you’ll be taxed on your gains.
An opportunity zone, however, doesn’t have to be set up prior to closing on the sale of your previous property. You do need to roll the money into an opportunity zone fund within 180 days of closing on the previous sale. And you do need to have an opportunity zone fund set up. You should consult your attorney and CPA before any type of investing; this is highly recommended for an opportunity zone fund investment as well.
A 1031 exchange allows you to defer taxes. However, you will have to pay the taxes eventually when you sell the property (unless you continue to implement 1031 exchanges).
Opportunity zones allow you to defer taxes until 2026, but you can step up the savings basis by 10% to 15%. At the end of 2026, you’ll pay taxable income on your original investment, but you save the 10% or 15% step up. After you’ve held the property at least ten years, the appreciation gains are not taxable at any point in the future.
Type of Asset and Opportunity Zone Neighborhoods
Your next challenge to consider is the type of asset to buy. If you’re buying fixer uppers, there are rules you must follow for improvements. One is that you must “double the basis.” This means that you must invest 100% of the purchase price into the property in the form of renovation or new construction in order to qualify. For example, if you buy a property for $50,000, you must put at least $50,000 worth of work into it. New construction properties like we offer at JWB work really well because building the new house easily allows you to “double the basis.” This removes the hurdle altogether.
Inventory in good cash flowing neighborhoods is hard to source. We’re blessed to be in Jacksonville where the opportunity zones happen to be in the areas we already know and love for investing. This is an incredible advantage to JWB and our clients.
Interested? JWB Can Help You Get Started
If you think opportunity zones might be a good option for you, reach out to our team and we’d be happy to get you started. Call JWB at (904) 677-6777 or email us at email@example.com.