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Opportunity Zones in New Jersey – A Little Known but HUGE Tax Loophole for Real Estate Investors Thinking About Doing a 1031 Exchange or Selling Stock

Published On: November 12th, 2018Categories: Real Estate Law

Investing in Real Estate already had many tax advantages. The 2017 Tax Cuts and Jobs Act (TCJA) not only left the vast majority of these benefits in place for real estate investors, but even added some more!

One of these is designating “Opportunity Zones” and allowing investors to form an “Qualified Opportunity Fund” to invest within those zones. The fund can be an LLC, partnership or a corporation, but if an LLC that LLC must elect to be treated as a partnership or corporation on its tax return. The entity becomes registered with the IRS by filling out the two-page form 8996 (here is a link to the latest draft of the form). If you sell property or stock at a gain, and re-invest that money within 180 days by buying an investment property within one of the Opportunity Zones using your Qualified Opportunity Fund, then you could owe zero capital gains tax on the prior gains and on the future gains from a future sale of the property. So long as you hold onto the property for at least 10 years. However even if you hold onto it for just 7 years, you would be able to wipe out up to 15% of the capital gains tax owed on the prior gains which were transferred. Since many times a seller’s capital gains tax is only 15%, this will often mean there is no tax owed on the prior gain (though it might be owed on the gain from when you sell the Opportunity Zone property). If you sell after 7 years. If you sell after 5 years, you can wipe out 10% of the capital gains tax, meaning you would owe just 5% or 10% (depending if you qualify for the 15% or 20% capital gains rate).

It works a lot like a 1031 exchange, but with some major benefits for those who qualify. Here are some of the major differences:

  • It allows you to not only defer income tax on the gains but if you hold the property for 10 years you will owe no taxes on the gain! Ever! (unlike a 1031 which defers taxes but doesn’t actually eliminate them).
  • You are not stuck with like-kind exchange rules, unlike a 1031 you can sell a stock (not just real property) and invest the proceeds from that stock
  • It appears that you are not required to buy a property of equal or greater value to that which was sold. So if you sell a property for $300k, at a $100k gain (ie profit), it seems you could buy an opportunity zone property for only $100k and still qualify.

These are HUGE benefits over doing a traditional 1031. However the number and size of the opportunity zones are very limited, so the challenge will be finding the right property for you that is still within one of the zones. Attached for your reference is the list of Opportunity Zones in New Jersey in Excel, as well as the Census Tract Map of New Jersey, downloaded from the State and Federal Websites. You can cross-reference the zones and find out if a property in a given location qualifies or not. The attached are accurate as of the date of this blog post, but you can check for any changes/updates directly at the State Web Site here.

Many tax professionals are still behind in learning the new law, so it is up to you to make sure you are planning accordingly. Nobody knows their business better than you do. By having knowledge of the tax laws surrounding real estate you can reach out to your accountant or tax planning attorney and have them deal with and advise you as to the details.

Caveat: This is generalized tax advise that may not apply to your specific situation since there are some exceptions as to who qualifies. Furthermore the rules and IRS interpretations/instructions are not yet complete as of this writing, so some of this information could change when the instructions are finalized. They are expected to be finalized in December of 2018 according to the IRS web site. As always, seek out advise from a tax professional for your specific situation to make sure you qualify before planning any purchases around this new rule. Finally this provision is set to expire in 2026 unless it is renewed by Congress. They would likely grandfather anyone in who bought the property before 2026 but sells afterward, but it is not 100% clear to me whether that is expressly intended by the Act or whether it must be expressly authorized by Congress again in 2026. These details and more will likely be sorted out in the next few months by the IRS.

Microsoft Excel

nj_opportunity_zone_list.xls

Adobe Acrobat PDF

census_tract_map.pdf

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