The Tax Advantage of Opportunity Zone Investments in Puerto Rico

Puerto Rico City Skyline

How to minimize and defer your 2018 capital gains taxes while still generating an ROI as high as 20%.

If you have generated a substantial capital gain from your investments in 2018 – 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 that capital gain tax while using the funds from such gain to invest in high-growth opportunities.

What’s an Opportunity Zone?

An Opportunity Zone is an economically-distressed community that has been nominated for the designation by the 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 2018 capital gains for 8 years if the profits are reinvested and held in an Opportunity Zone, decrease the amount of such capital gains taxes by 10% and 15% if held for five or seven years, respectively, and also provides a full exemption from capital gains tax on all future capital gains on the invested funds if an investment is held for 10 years, starting in 2018.

Opportunity Zone Map
US Map of Opportunity Zones

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 and bonds, 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, almost the entire territory of Puerto Rico is now designated as an Opportunity Zone.

Opportunity Zone Map Puerto Rico
Puerto Rico is almost entirely zoned as an Opportunity Zone

As such, investing into qualified projects in Puerto Rico, which is part of the U.S. and is therefore protected by the same property rights and other legal regulations as are applicable in the mainland, is now a highly strategic investment for minimizing capital gains tax for investors who plan to keep their reinvested capital within the territory.  

As a U.S. territory, Puerto Rico enjoys legal and economic benefits that are not available to the neighboring Caribbean islands.

Unlike other Opportunity Zones in the continental U.S., Puerto Rico offers unique 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 a bargain price.  

Also, since it’s easier for U.S. citizens to travel there, it has an increasingly robust tourist industry. Meanwhile, the use of US. dollars minimizes the currency risks.In addition, the real estate prices in Puerto Rico are substantially lower than properties with the equivalent characteristics.  

You can find beachfront properties at substantial discounts to counterparts on the mainland and historic old city buildings for almost half the cost of the old city in Cartagena.

With a low acquisition cost and a sound 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.

Example: Earning nearly 1000x the original capital by investing in an Opportunity Zone

Many crypto investors have experienced substantial capital gain over the past few years.

For example, an investment of $10,000 in Bitcoin in 2010 would have yielded $4,094,400 if the bitcoins were sold on August 27, 2018 – representing a capital gain of $4,084,400 for the 2018 tax year.

Let’s say this example investor is a single filer living in Miami, Florida (one of the U.S. states with no state or local income taxes nor capital gains taxes) with just under $500,000 of ordinary income in the 2018 tax year.

The capital gains of $4,084,400 will result in a capital gains tax liability of $972,087 at an effective tax rate of 23.8%.  

This 23.8% effective tax rate is comprised of U.S. federal capital gains rate of 20% (maximum rate for single filer) plus the NIIT (net investment income tax) of 3.8% (single filer with cap gains above $200k).

This would translate into nearly $1.0 million handed over to taxing authorities!

What can you do to defer the tax payment and keep more money in your pocket?

Instead of selling your Bitcoin, paying up to 23.8% of the profits in the form of taxes, and stashing the net balance in your bank account (just to watch the money depreciate!), you can make a real estate investment in Puerto Rico and take advantage of the Opportunity Zone tax benefits.

Let’s go back to our example: instead of selling the Bitcoin, our investor can invest the $4,094,000 value in a Qualifying Opportunity Zone Fund.


Let’s say he or she invests in the Lifeafar Plaza Colon Puerto Rico Project, which has a projected annualized IRR of 15.4% for investors.

If the investor rolls over his original investment plus earnings ($4,094,000) from the sale of his Bitcoin in the Opportunity Zone Fund and holds the asset for 10 years, they would be projected to receive net rental incomes of approximately $2.9 million over such period ($4.5 million less 35% federal income tax on ordinary dividends at the individual taxpayer level), and he investor’s share of total proceeds on the sale of the asset would be approximately $7.8 million, representing a $3.7 million capital gain over the initial $4.1 million investment.

After 8 years of holding the investment in the Opportunity Zone Fund, in our example the  investor would pay only 85% of the original capital gains tax liability from the 2018 Bitcoin sale and zero capital gains tax on the capital gains in the Opportunity Zone investment.

The net post-tax cash returned to the investor would be approximately $9.9 million ($4.1 million investment plus $2.9 million net rental income plus $3.7 million gain on sale of asset, less $826k of 2018 capital gains tax liability).

Now you may wonder, how does this strategy compare to investing in the U.S. stock market?

If we use a historical average return of the U.S. stock markets of 7% and our example investor (single filer Florida resident with income of just under $500k) uses his net cash after capital gains tax of $3.1 million ($4,084,000 cap gain less 23.8%, plus initial $10k) to purchase stock, he would have netted total earnings of $3.0 million in 10 years and would owe $719k in capital gains tax on those earnings, yielding $5.4 million in net cash returned taking into account the initial invested capital.

That’s $4.5 million less than investing in the Lifeafar Plaza Colon Puerto Rico Project Opportunity Zone Fund.

In just 10 years, investing in the Lifeafar Opportunity Zone Fund yielded our example investor nearly 1000x of his original $10,000 capital!

A not-to-be-missed investment opportunity

Here at Lifeafar, we’re excited to be negotiating several multi-million dollar real estate deals in Puerto Rico. These projects are the perfect investment vehicles for anyone with capital gains to invest in an Opportunity Zone.

These investments in Old San Juan will be converted into hotels and vacation rental properties to benefit from the booming tourist economy on the Caribbean island.  

Want to find out more? Join us on November 13-14 in San Juan, Puerto Rico for the Lifeafar 2018 Investor Conference.

We’ll be announcing these amazing deals, showing you how to achieve an 15% – 20% return on your investment plus additional returns for Opportunity Zone investors, and how to get qualified for 0% personal tax or just 4% corporate tax.

Want to learn how to defer your capital gains tax and invest in Puerto Rico?

Fill out the form below to receive information on the investment opportunities available.

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