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The Qualified Opportunity Zone (QOZ) program was created by the Tax Cuts and Jobs Act of 2017 to encourage long-term investment in designated communities known as Qualified Opportunity Zones. QOZs are also required to be either new developments or substantial renovations must be made to existing buildings.
The Internal Revenue Code has traditionally permitted investors to exchange real property used for business or held for investment purposes for other business or investment property of the same type and has referred to these swaps as “like-kind exchanges.” Thus, making such an exchange would not expose the taxpayer to taxes on any gain unless they received the increase as non-like property or in money.
In a 1031 Exchange, a taxpayer defers capital gains taxes on the sale of real estate by exchanging the proceeds from the sale into a “like-kind” property of equal or greater value. The transaction derives its name from Section 1031 of the Internal Revenue Code. In addition to the tax on your capital gain, you may need to pay a state capital gains tax, depreciation recapture, and NIIT (Net Income Investment Tax) when you sell investment property for a price that is greater than your basis in the property. Instead of just selling, by completing a 1031 exchange, you can potentially defer each of these obligations.
Completing a 1031 exchange can be an excellent method of making changes in your real estate portfolio while deferring capital gains and other tax obligations. However, the effort requires advanced planning and discipline to succeed. Investors should begin considering potential replacement assets before selling the property targeted for relinquishing in most cases, particularly when competition for real estate is challenging, as it is today.
Real estate investors who have the ability to keep investment capital in an illiquid state often complete 1031 exchanges in order to defer capital gains taxes on the sale of real property assets.
Opportunity zones were developed to bring economic prosperity to distressed areas by giving potential tax incentives for investments in residential and commercial properties.
The Qualified Opportunity Zones (QOZs) define areas where investors can see potential federal tax incentives by deferring or reducing the liability of capital gains taxes realized on their investment. The program was established in 2017 in the Tax Cuts and Job Act.
A Tenant-In-Common or TIC ownership structure is one in which a group of investors co-own property. Despite the name, the investors are not the tenants; the properties are leased to tenants. The TIC structure has specific rules, including these:
A tenancy in common arrangement provides a way for investors to dip their toes into property ownership without the financial burden of being a solo investor. While a tenancy in common isn’t exactly a type of mortgage loan, we’ll explain financing options for this type of ownership structure.
Much of what has been written about the Opportunity Zone program seems to focus on individual investors and specially formed LLCs that are treated as partnerships or corporations. In these arrangements, such entities funnel capital gains created from the sale of investments into Qualified Opportunity Funds (QOFs). Those funds are then invested in Qualified Opportunity Zones, or QOZs.
Contrary to what the name suggests, structural risk has nothing to do with the physical structure of the building. Structural risk refers to the financial structure of the investment and the rights that the structure provides to the individual participants. No real estate investment is invulnerable to risk, and investors must understand the potential dangers.
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