Increasing the velocity of your wealth: Shelter capital gains through opportunity zone funds

Any time you have to pay a large amount in taxes when you sell an asset, the velocity of your money decreases. The rapid price appreciation of real estate since the end of the recession in 2012 has kept many homes off the market. The reason? Current tax law states that a single person can exclude $250,000 of gain from their personal residence, and it will not be subject to capital gains tax. A married couple can exclude up to $500,000 of gain. Those numbers have been part of tax law for years. The issue now, however, is that home prices have surged. Several years ago, it was very likely you could shelter all the proceeds of your personal residence sale from taxes. Now, with the average sales price over $1 million in Boulder County, many homeowners are finding that if they sell, they can expect a huge tax bill. Therefore, they are deciding not to sell. According to Chris Bryant of RBC Wealth Management in Colorado, an alternative to signing a check for the amount of the tax due is to invest in an Opportunity Zone Fund. In 2017, the Tax Cuts and Jobs Act created the Qualified Opportunity Zone program to provide a tax incentive for private, long-term investment in economically distressed areas. An Opportunity Zone is a community nominated by the state and certified by the U.S. Treasury Department as qualified to be a part of the program. That act created 8,700 Opportunity Zones in all 50 states, including a few in Boulder. Opportunity Zone Funds are available for investors to defer and potentially reduce or eliminate tax on capital gains. The Fund Manager invests in a selection of Opportunity Zone projects. These investments are only available to Accredited Investors. An Accredited Investor is someone with at least $1 million in net worth or $200,000 of annual income as a single person or $300,000 for a couple. Investing in a Qualified Opportunity Zone Fund has several benefits. An investor with substantial capital gains tax liabilities from any (stocks, bonds, real estate, etc.) prior to investment can defer, reduce, and possibly eliminate the tax due if all the criteria are met. Tax savings are only available when an investor is willing to retain the investment in the Qualified Opportunity Zone Fund for specific periods of time. The greatest benefit occurs if the investment is held for 10 years. If you are going to invest in an Opportunity Zone Fund, you need to do it within 180 days of the sale of the appreciated asset. The investor may invest the return of principal as well as the capital gain, but only the portion of the investment attributable to the capital gain will qualify for the tax on any appreciation of the Opportunity Zone Investment. Often real estate is owned by an entity, rather than an individual. An investor who receives a capital gain from a pass-through entity, like a partnership, an S-corporation, or a trust/estate, has 180 days from the end of the calendar year to make an investment in an Opportunity Zone Fund, no matter how early in the calendar year the entity realized the capital gain. There are no investments that are risk-free. Opportunity Zone Funds have been around for a relatively short period of time. If you are facing a significant tax liability due to capital gains from any source, exploring the opportunity to invest in a Qualified Opportunity Zone fund would be worthwhile. Consult your financial planner to determine if you qualify to invest, which Opportunity Zone Funds are currently available for investing, and what the levels of risk are. Learn more about the Colorado Opportunity Zone Program with an interactive map at: oedit.colorado.gov/coloradoopportunity-zone-program

Duane has been a Realtor since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duaneduggan@boulderco.com, call 303.441.5611 or visit boulderco.com.