Time Is Running Out to Maximize Opportunity Zone Investment Tax Benefits

Beach chairs in Puerto Rico

You need to invest before the end of 2019 to reduce your capital gains tax by 15%

If you have generated capital gains this year and want to reduce the tax due, time is running out to maximize Opportunity Zone investment benefits.

The introduction of Opportunity Zones by the Tax Cuts and Jobs Act in December 2017 has given many investors the chance to invest and grow their profits while at the same time deferring and reducing their tax liability. 

The law allows investors who recognize a capital gain from capital assets (e.g., stocks, mutual funds, residential and commercial real estate, cryptocurrency, artwork) to roll the gain into a Qualified Opportunity Zone fund and defer paying any capital gains tax due for several years until 2027. 

Investors also receive a 10% reduction in the original tax due if they hold the Opportunity Zone investment for five years, and a 15% reduction if they hold the new investment for a full seven years, but such funds must be invested in a qualified investment before the end of 2019 to take that 15% reduction. Investors also pay no capital gains tax on any capital gain profit from the Opportunity Zone investment if the asset is held for at least 10 years.

There isn’t much time left if you want to maximize the tax advantages of investing in a Qualified Opportunity Zone funds. The deferred tax will be included in the federal amount due for the tax year ending December 31, 2026, which is seven years from the end of 2019. 

While you can still invest in a Qualified Opportunity Zone fund in 2020 and beyond, you won’t be able to get the maximum 15% tax reduction on your original investment if you do not invest before the end of 2019 because you will be unable to meet the seven-year holding period for the maximum benefit.

Additionally, investors only have 180 days from the sale of the original asset to invest in a Qualified Opportunity Zone fund and take advantage of the tax incentives described above.

Here’s what you need to know about Opportunity Zones before some of the benefits disappear.

What are Opportunity Zones?

An Opportunity Zone is an economically-distressed community designation by each state governor and certified by the Secretary of the U.S. Treasury.

The Benefits and Challenges of Investing in Opportunity Zones

Here’s why you should consider investing in Opportunity Zones:

  • You can roll the capital gains from the sale of any capital asset (e.g., real estate, stocks, bonds, cryptocurrency, artwork) into a Qualified Opportunity Zone investment.
  • You only need to reinvest the capital gains instead of the entire proceeds from the sale of a capital asset to become eligible for the tax deferral and reduction.

However, investors also face some challenges when investing in Opportunity Zones. For example, the choice of viable investments is relatively narrow, and the time pressure to comply with the strict IRS 180-day reinvestment rule can cause investors to make poor decisions.

Choosing the Right Opportunity Zone Investment

To take full advantage of Opportunity Zones, you should select investment vehicles that are designed to optimize your return while minimizing the risk.

For example, participating in the purchase of older buildings in Opportunity Zones where property values are low and opportunities exist to renovate them to increase their future sale value that also provide current rental income is a proven way to generate consistent passive income with minimal downside and strong tax benefits.

You can find opportunities like this in Puerto Rico. Almost the entire territory has been designated as an Opportunity Zone thanks to IRS regulations.

Over 98% of Puerto Rico has been designated as a Qualified Opportunity Zone

Because Puerto Rico is part of the U.S., it enjoys legal and economic benefits not available to neighboring Caribbean islands. Investors are protected by the same property rights and regulations as they would in the mainland, so investor risk is minimized.

In addition, lower real estate prices and booming tourism (which attracted 3.7 million visitors in 2019) make investments in rental properties very compelling. Thanks to low acquisition costs and a robust vacation rental market, projected returns on real estate investments in Puerto Rico can reach 15% to 20%, and that’s before taking into account Opportunity Zone tax benefits.

Lifeafar successfully raised over $10 million USD to acquire and redevelop Plaza Colon Hotel & Suites in San Juan, Puerto Rico

The key to taking advantage of Opportunity Zone tax incentives is to make sure that you’re working with a reputable company that has the expertise and resources to identify the right opportunities and negotiate the best deal for investors.  

For example, Lifeafar’s investors benefit from our diverse talents in asset management, corporate finance, property management, accounting, marketing, and operations. These resources allow us to identify opportunities, complete deals, and generate above-average returns for our investors.

The combination of a high-quality portfolio, an established development capacity, and extensive property management experience mean all our investment properties are selected to meet the needs of the market and generate the highest return on investment while minimizing risk.

Want to learn how to reduce your capital gains tax by investing in Puerto Rico?

Complete the information below to learn more about our current Qualified Opportunity Zone investment opportunities in Puerto Rico with a projected pre-Opportunity Zone investment IRR of 16-19%.

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