How to invest in real estate and pay nothing in capital gains because of this new tax break


I like this.


An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Anthony P. Curatola, Market Watch, 

Hold an investment in a Qualified Opportunity Zone fund for a decade and pay nothing on your gains

The 2017 tax law created tax breaks for investing in economically distressed areas.

The Tax Cuts and Jobs Act has created a new tax break that dangles the potential of a 0% capital-gains tax on certain investments in economically distressed areas. But you’ll need to wait 10 years to claim it.

These new investments are funds tied to Qualified Opportunity Zones — approximately 8,000 areas around the country, both urban and rural, that local officials have designated as most in need. Qualified investments can be in real estate — commercial property is an early favorite — as well as small manufacturers and service businesses.

The tax code now encourages long-term, patient private capital to invest in eligible low-income rural and urban communities, called Opportunity Zones, all across the United States. To learn more visit

Tax breaks on investments in Qualified Opportunity Zone funds or businesses begin kicking in after five and then again after seven years; but the most generous terms — that 0% rate — are for investments held for at least 10 years.

How do I get this tax break?

A taxpayer sells an existing investment such as stocks, yielding a capital gain. Special rules apply to the sale of real estate used in a trade or business. The taxpayer then has 180 days to invest part or all the capital gain into a QOZ fund and fill out IRS Form 8949. There is no requirement to invest all the proceeds from the sale; a person could invest only the capital gains. Those capital gains are deferred and are reduced with time. But only the capital gains on the QOZ investment will eventually be eligible for that 0% tax break.

What is a QOZ fund?

This is an investment that is set up as a partnership, corporation or an LLC (partnership or corporation) for investing in eligible property in a QOZ area. The taxpayer doesn’t have to live in, work in or have a business in the QOZ area — only the fund needs to own an eligible property or business in the QOZ. Businesses that don’t qualify include golf courses, country clubs, massage parlors, suntan studios, racetracks and casinos.

If you are considering moving your business to a QOZ to claim the tax breaks, consult your legal and tax advisers.

How do the tax breaks work?

There are two potential tax benefits to investing in a QOZ fund.

The first is that taxpayer defers the capital-gains tax that would have been incurred from the sale of the initial investment until the stake in the QOZ fund is sold or Dec. 31, 2026, whichever comes first.

If the investment in the QOZ fund is held for at least five years, the cost basis of that investment goes up by 10% of the deferred capital-gains amount.

If the investment in the QOZ fund is kept for another two years (so a total of seven years), the investment’s cost basis goes up by another 5% of the deferred capital gains. Therefore, only 85% of the capital gains realized from the initial investment and rolled over into the QOZ fund are subject to capital-gains tax. This also applies if the QOZ fund is sold after Dec. 31, 2026.

Example: Taxpayer A invested $100,000 in Investment X in 2016 and liquidated the investment for $300,000 on Aug. 15, 2018, generating a capital gain of $200,000 If this taxpayer invests the entire $300,000 into the QOZ fund on Oct. 1, 2018, she does not pay any capital-gains tax on the $200,000 of capital gains. (She can invest as little as $200,000 of the $300,000 proceeds and not incur any capital-gains tax by submitting Form 8949.)

If the investment in the QOZ fund is sold for $600,000 before the five-year holding period has elapsed, there is a taxable capital gain of $500,000, which is the $200,000 of deferred capital gains and $300,000 of appreciated capital gains from the QOZ fund.

By liquidating the QOZ fund after five years but before the seven-year period has elapsed, Taxpayer A first increases the basis in the investment to $120,000, which is $100,000 plus $20,000 (10% of the deferred $200,000 in capital gains). That leaves a taxable capital gain of $480,000 ($600,000 – $120,000). It breaks down as $180,000 of deferred capital gains ($300,000 less the $120,000 basis) and $300,000 of appreciated capital gains. As a result, Taxpayer A not only deferred but also reduced the amount subject to capital-gains tax from $200,000 to $180,000.

If Taxpayer A keeps the investment past Dec. 31, 2026, capital-gains taxes are still owed on the deferred gains, in this case on $170,000 ($200,000 of deferred capital gains less the $30,000 increased basis, which is 15% of the deferred $200,000 in capital gains).

That 0% rate

If a taxpayer keeps the investment in the QOZ fund for at least 10 years, the appreciated capital gains on the QOZ fund investment becomes tax-free income when the investment is sold or exchanged. The long-deferred capital-gains taxes owed on the investment rolled into the QOZ will still have been paid once Dec. 31, 2026 rolls around, as illustrated in the previous example.

It is only the appreciated value of the QOZ investment that is tax-free, and there is no limit on the amount eligible for this tax break. If the investment in the earlier example was sold for $600,000 after 10 years, no taxes would be owed on $300,000. But deferred capital gains would have been paid on $170,000.

What other issues should you consider?

As with any investment, there are risks, including the potential for losses. Some additional factors to consider include:

1. How long are you prepared to maintain this investment for? Five years? Seven? More than 10?

2. Are there any state and local tax benefits for investing in a QOZ area, such as hiring incentives and reduced property taxes, in addition to the federal tax breaks?

3. How much additional risk is there given the fact that QOZ areas are distressed areas or ones in need of revitalization?

4. How easily will you be able to sell your investment in a QOZ fund?

Like with any investment, taxes should not be the only motivating factor. Consult a qualified tax and investment adviser before deciding to move current investments into a QOZ fund.

Anthony P. Curatola is the Joseph F. Ford Professor of Accounting at Drexel University’s LeBow College of Business and editor of the Taxes column for Strategic Finance.

Tags: , , , , , , , , , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting