How to Invest in Opportunity Zones and Avoid Capital Gains

In the United States, a tax is imposed on capital gains, a profit made from selling a property. Real estate investors can only avoid the capital gain tax is to reinvest it in Qualified Opportunity Funds. The Qualified Opportunity Fund holds at least 90% of the real estate opportunity zone holdings, specifically those acquired after December 2017. The government always identifies the opportunity zone areas and is certified by the IRS.

Conditions To Avoid Tax on Capital Gains

Opportunity zones are tools used in the field of economy in the United States that give individuals a chance to invest in distressed areas. Investing in a qualified opportunity zone as a taxpayer through a qualified opportunity fund in the United States can temporarily help you as a real estate investor to defer tax on the amount of the eligible gains you invest. To do this, you need to transfer property instead of cash as an investment to a qualified Opportunity Fund. It is important to note that the amount of gain you avoid is calculated based on the contributed property regardless of the property’s value you have transferred.

It is important to note that not every investor, especially in the real estate business, is qualified for a tax avoidance system. There are conditions that have been put in place by the IRS to defer tax imposed on capital gains. All these conditions touch on qualified opportunity funds and investing in areas considered to be distressed, given that low-income households occupy them.

Reinvesting The Capital Gains in The Qualified Opportunity

Avoiding the capital gain as a real estate investor in the opportunity zone areas requires you to reinvest the profit in the Qualified Opportunity Fund within 180 days after the sale. The next requirement you as an investor must meet to avoid the tax imposed on capital is to file for the forms that would prove your qualification for such exemption.

Meeting The Annual Investment Requirement

One must meet the annual investor reporting requirements, which can be possible if you have had a Qualified Opportunity Fund at some point in the year. According to the IRS, an investor who wishes to avoid capital gains must fill out certain forms every year, for instance, form 8997, the Initial and Annual Statement of Qualified Opportunity Fund Investments, plus the timely filed federal tax return.

Timing Of the Investment

Another way of deferring capital gain tax is by focusing on the timing of the investment. Being a real estate investor in the opportunity zones and would wish to defer the capital gains tax, one must invest in a Qualified Opportunity Fund for equity interest within 180 days upon realization of the gain. In case you fail to file for tax avoidance within the specified period of 180 days, there is a high chance it would be recognized as a federal income tax purpose on the first day of the 180 days.

As a real estate investor within an opportunity zone, it is important to reinvest the profit from the investment in a Qualified Opportunity Fund. The Qualified Opportunity Fund has a lot of significance as it provides you with an opportunity to avoid tax that is imposed on capital gains. There are conditions that you as an investor must follow apart from investing in the opportunity zone regions to qualify for tax avoidance on the capital gain on the real estate.

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Created on Nov 7th 2022 11:52. Viewed 206 times.

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