Real Estate Opportunity Zones Explained – Move Your Business To An Opportunity Zone SHOULD YOU?

Real Estate Opportunity Zones Explained – Move Your Business To An Opportunity Zone SHOULD YOU?


(upbeat music) – [Toby Mathis] Are there any advantages to moving our software business into a designated Opportunity Zone? Jeff, what do you think? – [Jeff] I don’t think there is. If you’re an existing business, you’re not going to get any advantage from moving into an Opportunity Zone. – [Toby] Alright, so let’s go back and break this into
little pieces, first off. – [Jeff] Okay. – [Toby] Opportunity
Zones, they are a creature of the Tax Cuts and Jobs Act. They came about at the end of 2017, and then first showed up in 2018. All states designated certain zip codes as economically disadvantaged
areas that need investment. That’s what an Opportunity Zone is. You can actually go read about it. It’s 26 USC 1400Z, ’cause
they put a big Z for zone. It’s one and two. So the Opportunity Zone are these economically disadvantaged areas where the government wants,
basically, investment, and the way it works is if you
invest in one of those areas and you hold the investment, and what it really comes down to is you invest in something called a fund, an Opportunity Zone fund, and
it invests 90% of its capital into Opportunity Zone property,
which could be a business, it could be real estate there
under certain circumstances, and you hold it for 10 years, any gain on that property,
you do not have to pay tax on. You hold it for 20 years,
zero gain, no capital gain, so if I buy a business
or I invest in a business and it’s worth a million bucks
and it goes up to 10 million, I pay nothing on all that gain. Certain real estate will work if you double the improved value of that. You have to invest as much cash
as the improvement’s worth. We always use the example, like
if you put a million dollars into the Opportunity Zone,
you buy a property at 600,000, 200 is its land, 400
is its improved value, you just need to put $400,000 into that in the first 31 months. You have 31 months to do it. And it works. What’s kind of weird is
there’s two pieces to this. There’s that side, and then
there’s also a deferral side. And the deferral side says if
you had a capital gain advance and as long as you take those gains and invest it into the
Opportunity Zone within 180 days, then you do not have to pay tax on that for up to seven years. And then when you do pay tax
on it, you only pay tax on 85%. If you wait at least five
years, you only pay a 90%, and then after seven years,
you get what’s called a step-up of 15%, so you only pay tax on 85% of it. So there’s those sides, so that’s why people do Opportunity Zones, is you get deferral for seven years, you get a reduction in the amount that you end up having to pay that’s equivalent to about 15%, and then you pay nothing
on any of the gain. So let’s go back to your question. If you have a software business, and would there be an advantage to moving into the Opportunity Zone? There could be if you’re acquiring
real estate in that area, if you’re acquiring another property, another software business, or
if you’re seeking investment. So if I moved my business
into the Opportunity Zone and then said I want to go raise money, now you have a pretty good reason why somebody would want to give you money, but you couldn’t be the one
who gets the real benefit. You already own it, so
you’re disqualified, so you can’t do it on your own business. Some of that’s in that code provision, was 26 USC 1400Z, 1400Z. (upbeat music)

One thought on “Real Estate Opportunity Zones Explained – Move Your Business To An Opportunity Zone SHOULD YOU?

  1. Are non real estate deals eligible for investment? What If I want to invest in a start up/new energy company located within a Qualified Economic Zone?

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