How to minimize and defer your capital gains taxes while still generating total returns as high as 20%.
If you have generated substantial capital gains from your investments – congratulations!
However, you may also be dreading the huge tax bill that’s coming your way.
The good news is that the introduction of Opportunity Zones by the Tax Cuts and Jobs Act in December 2017 can provide you with the perfect investment vehicle to defer your capital gain taxes while using the funds from those gains to invest in high-growth investment opportunities.
What is an Opportunity Zone?
An Opportunity Zone is an economically-distressed community that has been nominated for the designation by each state governor and certified by the Secretary of the U.S. Treasury.
The goal is to incentivize much-needed investments into housing, small businesses, and infrastructure in economically-depressed areas.
The creation of Opportunity Zones allows U.S. investors to defer all capital gains for eight years if the profits are reinvested and held in an Opportunity Zone investment. The capital gains owed will be decreased by 10% if the Opportunity Zone investment is held for 5 years, and decreased by 15% if the Opportunity Zone investment is held by for seven years. To be eligible for the 15% reduction the Opportunity Zone investment must have been made by December 31, 2019, but potential investors are still eligible for the 10% reduction.
Investors will also be exempt from capital gains tax on any future capital gains on the Opportunity Zone investment if it is held for 10 years.
The benefits of investing in an Opportunity Zone
- Investors only have to reinvest the gains instead of the entire proceeds from the sale of an asset to take advantage of the tax benefits.
- Gains from the sale of any capital asset – real estate, stocks, bonds, precious metals, Bitcoin, artwork, etc. – can be rolled into an Opportunity Zone investment.
- The types of businesses that are eligible for Opportunity Zone benefits are more wide-ranging compared to many previous incentive programs and include investments such as residential rental property businesses, which typically pose lower risks for investors.
Therefore, one of the most practical strategies to take advantage of this tax bill is to buy older buildings in Opportunity Zones, renovate them at a reinvestment cost that is greater than or equal to the purchase price, and then manage the building as a rental property.
For more information, we’ve created a detailed FAQ on the new opportunity zone regulations from the IRS and what that will mean for investors.
Puerto Rico: An Opportunity Zone with tremendous potential
The IRS recently announced some changes to the Opportunity Zone regulations. As a result, 98.5% of Puerto Rico is now designated as an Opportunity Zone.
Which means investing in a qualified Opportunity Zone project in Puerto Rico is now a highly strategic investment for minimizing capital gains taxes. And since Puerto Rico is part of the U.S., investors are protected by the same property rights and other legal regulations that are applicable on the mainland.
Plus as a U.S. territory, Puerto Rico enjoys legal and economic benefits that are not available to the neighboring Caribbean islands, which present additional opportunities for investors.
A history of debt crises and fiscal mismanagement, coupled with recent natural disasters, has resulted in market conditions in which investors can acquire prime real estate in Puerto Rico at bargain prices.
Also since it’s easier for U.S. citizens to travel there, it has an increasingly robust tourist industry. Meanwhile, the use of U.S. dollars eliminates any currency risk. In addition, real estate prices in Puerto Rico are substantially lower than comparable properties in the U.S. with the equivalent characteristics.
You can find beachfront properties at substantial discounts to counterparts on the mainland U.S., and historic old city colonial buildings at almost half the cost of the old city in Cartagena, Colombia and Causco Viejo in Panama.
With a low acquisition cost and a growing vacation rental market, total returns for real estate investment in Puerto Rico can be as high as 15% to 20% prior to taking into account the benefits available under the Opportunity Zone legislation.
Want to learn how to defer your capital gains tax by investing in Puerto Rico?
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