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Opportunity zones: Investment havens or taxation minefields?

April 15, 2020 / 5 min read

As the stock market faces increased volatility, some investors are considering diversifying into opportunity zone funds with capital gains from appreciated equities and other investments. But are they ready for prime time? Here’s what you need to know.

As the longest economic expansion in United States history encounters increased volatility, investors with a defensive mindset are wondering whether it’s time to sell stock or other appreciated assets and realize some profits. But an even more difficult question for many is how to reinvest the proceeds. After a decade of record returns, some tough questions on taxes will likely arise. One potentially tax-friendly alternative gaining attention recently is opportunity zone funds.

What are opportunity zones?

Opportunity zones are a category of investments created under the Tax Cuts and Jobs Act. The goal is to incentivize private investors to invest in qualified assets in low income communities by offering tax benefits linked to capital gains that are triggered by the sale of stock, certain sales of real estate, or some flow through holdings.

The potential tax benefits fall into three categories:

As with most tax benefits, “the devil’s in the details,” and opportunity zones are no exception.

 As with most tax benefits, “the devil’s in the details,” and opportunity zones are no exception. Opportunity zone investments are subject to a list of special IRS regulations which investors must check off to qualify for the tax benefits. Key items include:

Assessing the investment potential

While opportunity zone investments can offer attractive tax benefits, they should be treated like any other real estate investment  in terms of fundamentals. These are typically opportunistic investments that carry a lot of risk. An opportunity zone program doesn’t make a bad deal good; it makes a good deal better. Investors need to feel confident that they would have invested in it anyway and treat the tax savings as just an added benefit.

An opportunity zone program doesn’t make a bad deal good; it makes a good deal better.

Opportunity zone investments should be investigated like any other opportunistic real estate investment along with a couple of additional factors:

The majority of the tax benefit comes from that the property’s appreciation upon ultimate exit.

Plante Moran investment advisory team

Given the risk and complexity of real estate and opportunity zone investing, it’s important to have a multidisciplinary team of advisors evaluating and advising on investments. Plante Moran has a multidisciplinary team of real estate, tax, and wealth management experts who evaluate opportunities and can pull in resources from anywhere within the firm to benefit clients.

To find out more about real estate as an alternative investment, give us a call.

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