Apparently there is a new way investors can defer their taxes. Recently from a client I heard of the term “Opportunity Zone”. They informed me that one of my listings was in the opportunity zone. I had never heard of an opportunity zone prior to this conversation.
What is an Opportunity Zone?
Each state has a designated zone or zones. Businesses or individuals can temporarily defer taxes by investing in opportunity zones.
The idea is that opportunity zones would be in distressed neighborhoods. This way investors will be motivated to invest in these areas and will improve the communities. Find out more here from the IRS.
Opportunity zones are fairly new (2018) and I recommend confirming any information with an accountant or CPA before making any purchasing or selling decisions.
Opportunity Zones on Kauai
Kauai has two different opportunity zones. On the north shore past Princeville and on the South side in the Kukuiula area. The really funny thing is that the Opportunity Zones on Kauai are actually in very expensive areas on Kauai. I wouldn’t say that these areas are distressed in any way.
This Map shows all the opportunity zones on Kauai and in Hawaii.
How do Opportunity Zones work
**This is a brief summary. Certain forms must be filed, etc. please confirm with an accountant.
First off this is a temporary deferral until the ending of 2026.
An individual or business may defer all of their capital gains lets say $5,000,000 by putting all of their monies into a Qualified Opportunity Fund (QOF). A QOF is a partnership or corporation and is a vehicle for purchasing property in the opportunity zone.
The basis of the gain decreases after 5 years and more after 7 years. However it does not really make sense to do this because the deadline is Jan. 1, 2027 and it is already 2023. I don’t understand why the IRS put a “deadline” on the opportunity zones as people are just starting to understand them.
Investors can still take advantage of the deferral to post pone tax payment to 2027. Or keep their monies in the POF for 10 years or more to potentially avoid taxes on appreciation.
Catches to the Opportunity zone
- Certain properties like country clubs, casinos, gulf courses, massage parlors, race tracks and more are not allowed for QOF’s to purchase.
- There needs to be improvements up to 100% or more improvements done to the property. So if someone spent $1,000,000 on a property they would need to spend more than that amount in improvements. Within a 30 month period.
- It is my assumption that it may be difficult to find an accountant or anyone with much experience with opportunity zones.
It is not easy finding information on opportunity zones. Below are links that I found helpful.
https://www.nerdwallet.com/article/investing/qualified-opportunity-funds
https://www.irs.gov/newsroom/opportunity-zones
https://www.wellsfargo.com/the-private-bank/insights/planning/wpu-qualified-opportunity-zones/
We have a listing in the Kauai Opportunity Zone!
This property is turn key. However there are substantial improvements that someone could make.
To name a few:
- Adding a pool and hot tub.
- Due to the positioning of the future pool and hot tub the garage will most likely have to be taken down and converted to a game room/outdoor lanai.
- Adding photovoltaic.
- Adding an additional dwelling unit with garage.
- Adding an electric gate to the entrance.
