Knowing What Counts Podcast

Smart Investors Are Leveraging Qualified Opportunity Zones—Here's How

• Tim Provost, CPA • Episode 19

Share episode

Send us a text

 From Capital Gains to Tax Deferrals: Inside Opportunity Zones- Kiley Tomaskowicz Senior Tax Associate

The tax landscape is constantly evolving, and savvy investors are discovering powerful strategies to defer, reduce, and even eliminate capital gains taxes through Qualified Opportunity Zones. This eye-opening episode featuring Senior Tax Associate Kiley Tomaskowicz unveils how these special economic zones—originally created in the 2017 Tax Cuts and Jobs Act and now made permanent—offer a triple tax advantage that could transform your investment approach.

Kylie breaks down the mechanics of Opportunity Zone investing with crystal clarity, explaining how virtually any taxpayer can defer capital gains by reinvesting them within 180 days into designated distressed communities. The magic happens when you hold these investments—after five years, you'll see a 10% reduction in your original taxable gain; after seven years, that jumps to 15%; and perhaps most compelling, after ten years, any appreciation on your Opportunity Zone investment becomes completely tax-free.

But this isn't a simple tax play. As Kylie cautions, these investments require careful consideration of liquidity needs (your money will be tied up for years), compliance requirements (the rules are strict and penalties for non-compliance significant), and market risks (these zones need development for a reason). We also explore exciting new provisions for rural opportunity funds that offer enhanced benefits including a remarkable 30% basis step-up and reduced improvement thresholds. Whether you're looking to diversify your portfolio, support community development, or implement sophisticated tax strategies, this episode provides the roadmap you need to navigate Opportunity Zone investments successfully.

Want to learn more about how Qualified Opportunity Zones might fit into your wealth strategy? Visit TheMPGroupCPA.com or call 413-739-1800 to connect with our expert team and discover if this powerful tax incentive could work for you.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with Knowing what Counts.

Speaker 2:

Because success begins with knowing what counts. Opportunity zones promise big tax breaks for savvy investors, but the rules are intricate. Kylie helps unpack how they work, who they are and why. Timing is everything. Welcome back everyone. I'm Sofia Yvette, co-host and producer, back in the studio today with Kylie Tomaskowicz, Senior Tax Associate at MPCPAs. Kylie, how's it going today? I'm good. Sofia, how are you? I'm good and thrilled to have you on here today. So, Kylie, this is a topic that sparked a lot of interest and we're excited to dive in with you. But before we get started, can you start by introducing yourself to the listeners and discuss a little bit about your role at the firm?

Speaker 3:

Of course. So, as Sophia said, my name is Kylie Thomas-Gowitz. I'm a senior tax associate here at NP. I've been with the firm for about six and a half years, including my internship here, and I work with a diverse group of clients, from individuals and trust partnerships and other large to small scale businesses. We do tax compliance, as well as a lot of planning throughout the year.

Speaker 2:

Wow, now let's get into it a bit deeper. Kylie, provisions for qualified opportunity zones were made permanent in the most recent tax legislation. Can you explain what qualified opportunity zones are?

Speaker 3:

Qualified opportunity zones were actually created as part of the Tax Cuts and Jobs Act back in 2017. It created tax incentives by deferring tax in order to encourage long-term private investments in more distressed communities in the areas that could use more development, and it was made permanent in the most recent bill, the big beautiful bill.

Speaker 2:

Now, what are the key tax incentives associated with Qualified Opportunity Zone investments?

Speaker 3:

So there are three key pieces that are associated with the Qualified Opportunity Zones. The first piece is tax deferral. In the original law, capital gains invested in a Qualified Opportunity Zone could be deferred until the earlier of the sale of the Qualified Opportunity Fund investment, or now December 31st 2026. The new law allows for the earlier of the sale of the investment or five years after the investment is made. The second piece is reduction in tax. So if the new investment is held for at least five years, the basis of that original investment increases by 10%. If it's in home for seven years, your basis is increased by 15% and this decreases your overall gains from your initial investment. And the third piece is exclusion. So if your investment in the Opportunity Zone is held for at least 10 years, any capital gain appreciation from that opportunity zone investment is excludable from income.

Speaker 2:

Wow, Now who's eligible to invest in opportunity zones.

Speaker 3:

Any taxpayer can be eligible to invest in an opportunity zone. This includes individuals, corporations, partnerships and even trusts. This includes individuals, corporations, partnerships and even trusts. Any of those taxpayers that realize a capital gain can invest that gain into a qualified opportunity zone and potentially qualify for the tax benefits. Both short-term and long-term gains are eligible.

Speaker 2:

Now what types of investments qualify for Opportunity Zone benefits?

Speaker 3:

Real estate development qualifies. It can be a new construction or if it's an existing property, it has to be substantially improved. Regular operating businesses located within Opportunity Zones qualify, as well as partnerships or stock in new or existing Opportunity Zone-based businesses. We see these. The most common is that it's an investment within an investment partnership that's dedicated to funding those developments within the Opportunity Zones.

Speaker 2:

Now, how do the rules around substantial improvement work?

Speaker 3:

So I use the term substantial improvement when talking about existing real estate investments. That just means that the original property's cost basis must be at least doubled by the improvements within 30 months of the initial investment. So if you purchase a real estate investment for $50,000, you have to spend at least $50,000 in investments within 30 months of your initial investment, and that doesn't include the value of the land.

Speaker 2:

Now, what are the reporting requirements related to opportunity zones and some things people should watch out for before investing?

Speaker 3:

So there are a few key things to keep in mind. Only capital gains qualify. Long-term or short-term, both qualify, but ordinary capital gains do not. The gain has to be reinvested within 180 days, and these capital gains can include stock sales. If you sell real estate, sell a business or from partnership K-1 distributions, there are some activities that don't qualify and specific investments that don't qualify, including golf courses, country clubs, massage parlors, hot tub or suntan facilities, racetracks or gambling establishments and or liquor stores race tracks or gambling establishments or liquor stores. As far as reporting the QOZ, investments are reported on Form 8997. And then the offset to the capital gains is reported on Form 8949.

Speaker 2:

So, kylie, what are some risks or misconceptions about Opportunity Zones? Let's get into those.

Speaker 3:

Yeah. So something just to think about is the liquidity risk. These are long-term investments and investors may have their funds tied up for a decade. You have to hold the investment for 10 years to receive the full benefit of the appreciation exclusion. There's also compliance risk.

Speaker 3:

There are a lot of rules to qualify for an Opportunity Zone investment and the tax benefits, and failing to meet any of those rules could disqualify you, having to recapture all of the deferred gain back into income. There's potential penalties and interest on any tax that would have been due with that. There's also market risk. These are opportunity zones are selected specifically in places that need more development, so there's always the risk that investment may not yield the anticipated returns an investor is looking for. One more important piece to that is that a common misconception is that all investments in the Opportunity Zones are tax-free, which is not quite true. Only the appreciation from the Qualified Opportunity Fund investment, as long as it's held for 10 years or more, is tax exempt. The initial investment in capital gains receives a small step up in basis, but only deferral.

Speaker 2:

How would you advise clients who are considering investing in Opportunity Zones?

Speaker 3:

in opportunity zones. So, again going back to some of the risks, also, some things that we would want to discuss and think about is the client's timeline for realizing the gains the initial gains and if they will be able to plan to invest in an opportunity zone within the allotted 180 days. Their liquidity needs, since opportunity zone investments are quite long-term. Their liquidity needs, since Opportunity Zone investments are quite long-term. Due diligence on the qualified fund and any underlying investments to make sure that they will receive a return that they are expecting, as well as exit strategy planning, particularly around the 10-year holding period, in order to maximize the benefits.

Speaker 2:

And final question for you today, kylie what's on the horizon for Opportunity Zone funds and do you have any final thoughts for the listeners?

Speaker 3:

So, as we mentioned this, qualified Opportunity Zones were made permanent in the Big Beautiful Bill recently passed. These new rules will take go into effect on 1-1-2027. One of the big new pieces is that they develop. It developed a new program for rural qualified opportunity funds and these rural opportunity funds focus on rural development and they invest solely in rural areas. And it changes the basis step up a little bit to make this a better incentive for those looking to invest. This has a basis step up of up to 30% after five years, as opposed to the standard 10% of regular opportunity zones.

Speaker 2:

Wow, Kylie.

Speaker 3:

So there's one more piece to that. It also reduces substantial improvement threshold. Instead of 100% of your initial investment, it's only 50% of your initial investment that must be put back into the property as improvements. These opportunity zones will now be adjusted on a state-by-state basis every 10 years, so it's going to adjust as the state changes. But overall, opportunity zones can be complex and they require meeting strict guidelines, so we'd recommend talking to your accountant or financial advisors if you're interested.

Speaker 2:

Wow, kylie. I know we've certainly learned a lot today. Thanks for helping us make sense of opportunity zones. We'll see you back on the Knowing what Counts real soon. Take care, thanks, sophia.

Speaker 1:

Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit TheMPGroupCPAcom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.