Mark J. Kohler, a CPA and attorney, explains five tax strategies using Opportunity Zones created by the 2017 Tax Cuts and Jobs Act. Defer capital gains by reinvesting into these zones, reduce your deferred gain by 10% after five years and another 5% after seven, and exclude all gains made after you buy if you hold for ten years or more.
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Now, if you're a real estate investor, you probably already heard about the empowerment zone tax incentive. If not, you got to get up to speed. These are pretty cool. Now, what Congress and President Trump did back with the Tax Cuts and Jobs act, that huge legislation passed at the end of 2017, they empowered the Treasury Department to create 4,700 zones, areas that really needed some economic boosting. And they worked with the governors to identify these areas. Now, the government's pretty crappy at going in and improving areas. So what they decided is we're going to create some cool tax incentives to encourage real estate investors to go into these areas and buy properties and improve them. It's going to hopefully make our country a better place. Well, I've got five strategies you need to know about in regards to this legislation that could really help boost your bottom line and help make America better, better again. Did I really say that? All right, let's get into it. Number one, you get to defer the gain on the sale of a property when you invest in one of these Opportunity Zones. Think of it like a 1031 exchange. Some of you might be familiar with this. You sell a property, you buy a new one of equal or greater value. You don't pay the tax. You defer the gain until you sell the second property. You can sell three and buy one, sell one and buy three or more. I've got other videos on YouTube on 1031 exchanges. Well, the Opportunity Zone works like this, only it's better. You don't have to buy a new property of equal or greater value. All you have to do is invest the gain. So let's say you sell a property for 200 grand, but the gain was $50,000. You bought it for 150, you sold it for 200. Keeping it simple. So all you have to do is invest the $50,000 in the opportunity Zone and you don't pay any tax. You can defer the gain. Number two, you can take any capital gain and use it in this strategy. That's right. You could sell stock in your portfolio in Wall street, for lack of a better word. And you've got this capital gain from the sale of stock, which under a 1031 exchange, you could never turn around and just put in real estate and exclude the gain. But here you can. So let's say you sold that $200,000 worth of stock and you have a $50,000 gain again. Well, all you have to do is invest that 50,000 in an opportunity Zone property and no tax. You get to Defer that on even a stock gain. Number three, it even gets better. The gain is reduced over time. So the longer you hold the property, the gain is reduced as an incentive for you to keep that property and maintain it and make that area better. Right? This is the Opportunity Zone. Now, this is where it gets complicated, too. Down in the information below, our law firms produce three different articles. Part 1, 2, 3, on the opportunity Zone. Please click on those articles to read more and get more of the details. Now, as many of you know, I'm a CPA and attorney and a partner in a law firm and accounting firm. And we help clients all over the country with their tax and legal strategies when it comes to real estate and small business in general. So I'm hoping that this, you know, video here might open the door for you learning more about the services we provide. Because we love this stuff and we want to help you succeed better in your investing. Now, back to the point here. The gain is reduced over time. So what that means is if you hold the property at least five years, the gain is reduced by 10%. So you took that $50,000 you bought into an Opportunity Zone. Now the gain goes down by 10%. That's $5,000. So the taxable gain is now $45,000. Boom. Now, if you hold it at least seven years, the gain is reduced by another 5%. So now 15% of that gain is excluded forever. You just got a reduction in the capital gain. So what this means is, by 2026, you've got to pay the tax. If you hold it at least those seven years, by 2026, you actually pay the tax at that point. So your gain is deferred. Not until you sell the property. It's up until 2026. If you hold it that long, the gain is reduced by 15%. And then you would claim the gain on your tax return for your 2026, probably filing it by April of 2017. So 2027. Sorry. Like I said, a little complicated. You want to read up a little bit? But this is pretty cool. Again, that gain is excluded. Number four. It even gets better. I probably should throw in some Ginsu knives, right? Some of you are too young to know what that means, but some of you might appreciate that anyway. So here's how it gets better. There is a complete exclusion on appreciation from taxes. Okay, let me explain. If you hold the property at least 10 years, then sell the property. Under this legislation, you paid no tax on the appreciation from the date you bought the Opportunity Zone property. You hold it 10 years. If the property went up another hundred grand, you pay zero tax on any appreciation if you hold it at least 10 years. What? Right? Pretty cool. So in 2026, you get to exclude your gain. You get, you claim your capital gain, you got a deferral and a reduction. You hold it three more years for at least 10 years and then you decide to sell it. Any appreciation on the increase in value? Tax free. Pretty cool. Now number five strategy. And this is important to highlight even in this Opportunity Zone strategy. Make sure you implement your llc, your limited liability company in the strategy. It's not going to screw up the Opportunity Zones incentive. It's not going to create a due on sale clause with any mortgage. Soon as you buy this property in the Opportunity Zone, get it in an llc. These are tending to be, of course, dilapidated areas. You're going to create great cash flow. But you got to be careful. This could be an asset protection issue that you've got to take seriously. Make sure you get that property in an LLC and folks do your company maintenance. This just isn't one form the state. Oh, it was $50. I'm good to go. Those LLCs are getting pierced more and more with lawsuits around the country because people aren't doing their minutes. They're not maintaining an operating agreement, separate checking. We have a company maintenance program in our office. It's only 150 bucks a year to do all these pieces and parts to make sure your LLC is solid. And also, this is not just a one. Click on LegalZoom please if you have any questions on this. Our law firm sets up any LLC in any state for 800 bucks and you get a consultation with a real tax lawyer for an hour tailoring it to your plan. So get the LLC in place. It makes your incentive even better because you're protecting yourself from the legal side while you're also getting the tax benefits. So you get the whole package. In summary, I'm a firm believer in diversifying all of these strategies to get to your path to financial freedom. It's exciting. Real estate should be a part of your equation. Just like some Wall street pieces and parts and insurance and your own home and your business. I want you to have a well diversified portfolio of investments in and outside of Wall Street. They're going to help you better live your American dream. Now this Opportunity Zone is something that could be a huge help in that process. Thanks so much for watching that video. And I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just click in a mouse hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. 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