Investing in Opportunity Zones that qualify for tax benefits in the United States
Entrepreneur of the Week - Post Number 4
Hi guys,
Hope you have read and been wise so far and hope I have been able to sharpen you important points that will serve you in the future in recent posts. In the next post, I would like to present to you a program of tax benefits in the United States that is designed to encourage entrepreneurs and investors to develop and invest in real estate in relatively backward areas in the United States by providing relief and exemption from capital gains.
The “Opportunity Zones” program is a relatively new government program enacted in 2017 and is intended to encourage entrepreneurs and capitalists to make long-term investments in areas where people from low socio-economic status live.
In most cases, the qualifying "opportunity areas" are located in places inhabited by residents of the lower socio-economic class, but not necessarily, and sometimes more surprising and developed areas can also be found where the program applies.
So what are the expected tax benefits to the investor in these areas and how can they be utilized?
The tax benefit on investment in these areas is expressed in a graded benefit mechanism applicable to capital gains and determined definitively in accordance with the duration of the investment in an area defined as a qualifying opportunity area.
In the first stage, the investor will be able to take advantage of the tax deferral applicable to capital gains arising from the realization of an asset for the purpose of making a new investment in a qualifying opportunity area.
An investor who is interested in making a new investment in an area defined as a qualifying opportunity area and for the purpose of making this investment needs to realize an existing investment in which capital gain is embedded he can realize the existing investment without paying capital tax The first investment. This is a principle very similar to the principle of transfer of assets under section 180, only here the tax deferral applicable to capital gains can also apply to capital gains from the realization of shares and not only from the realization of a real estate asset.
By the way, from the Americans' point of view, the benefit is also valid for a foreign investor who generates capital income from the United States.
In the second stage, the stage of realization of the property in the qualifying area, the final tax rate for the capital gain will be determined according to the duration of the investor's holding in the property.
If the investor has owned the property for a period shorter than five years - there will be no benefit on the capital gain and the only benefit is in fact a tax deferral that the investor received at the beginning of the journey.
If the investor has owned the property for a period of between 5 and 7 years, he will receive a 10% discount on the tax owed in respect of the original capital gain generated.
If the investor has owned the property for a period of between 7 and 10 years, he will be entitled to a 15% discount on the tax owed in respect of the original capital gain generated.
If the investor has owned the property for a period longer than ten years, he will be entitled to a full tax exemption on all capital gains generated when realizing the investment in the property in the qualifying area!
In order to illustrate the benefit more clearly we will illustrate the above using a numerical example.
Suppose an investor named Yossi Cohen makes a profit of $ 100 from a flip deal. Since Yossi is in the highest tax bracket in the US, if he chooses to realize the investment now, he will be liable to tax at a rate of 20%, so at the end of the year he will have to pay about $ 20 tax on capital gains for this year. In order not to pay the tax immediately, Yossi decides to invest "rolling over" the money he received from the realization of the property for a new investment in an area defined as an "opportunity area."
In the first stage, Yossi will be able to benefit from a tax deferral for the capital gain generated when the first asset is realized. The final tax rate that will apply to the deferred capital gain will be determined according to the holding period in the newly acquired asset.
Now suppose Yossi realized the investment in the area that qualifies for an additional $ 50 profit and is still on a marginal tax of 20%, meaning Yossi's total profit from the final realization of the investment is $ 150 ($ 100 profit deferred from initial investment + $ 50 "new" profit)
- The acquired property was held for a period of less than five years - there is no benefit in the capital gain, Yossi will now pay tax in the amount of $ 30 in respect of a reported capital gain of $ 150.
- The acquired property was held for a period of 5 to 7 years - there is a tax relief of 10% in respect of the deferred capital gain and therefore the total tax payable is $ 28 ($ 18 tax in respect of the deferred capital gain + $ 10 tax in respect of the "new" capital gain)
- The acquired property was held for a period of 7 to 10 years - there is a tax relief of 15% in respect of the deferred capital gain and therefore the total tax payable is $ 27 ($ 17 tax in respect of the deferred capital gain + $ 10 tax in respect of the "new" capital gain)
- The purchased property was held for a period exceeding 10 years - all capital gains of $ 150 will be tax-exempt!
I am of course not a field person and I do not know how to point to investing in an opportunity area that will be a good or bad investment, but when we consider investing in an opportunity area from a tax perspective one can take advantage of the program to turn a good investment into a great investment!
Attached to the post is a photo of the currently approved opportunity areas in the US.
The aforesaid is not presented as a substitute for professional advice from an accountant and is only general information, which does not constitute binding professional advice and should not be relied on in any form. Any action taken according to the information and details stated in this post is the sole responsibility of the user. The purpose of the post is to help users expand their personal knowledge base only and allow them to know more, before turning to an accountant or any other expert.
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