This is an interview with Charles Holmes about Opportunity Zones, which came up in a discussion with a client. We think this information might be useful for you.
What is an “Opportunity Zone”?
An Opportunity Zone is an area designated by the federal government tax code for development. So it’s an area that’s more in need like an impoverished area. If you invest money in that Opportunity Zone you can defer Capital Gains you earned elsewhere.
Could you explain Capital Gains in a few words?
Capital Gains is the profit you make on an investment. So let’s say you bought a property for $1 million and sold it for $1.5 million, the $500,000 profit is what your gain would be if it was a cash sale. You can deduct the amount of any mortgage or sales expenses from the gain.
What kind of properties are possible to find in “Opportunity Zones”?
Just about anything. The incentive is by parcel so it could be zoned anything from residential to commercial to multifamily. Anything.
Where are the Opportunity Zones in King County?
All of Burien is an Opportunity Zone and most of White Center. Of course, there is nothing over on the east side like Bellevue or Kirkland. None of those areas would qualify.
What did you find most?
Mostly I found Multifamily or Residential Properties that were Single Family or the possibility for an additional lot of multifamily.
When this incentive was established in the market?
The change of the tax code that allowed opportunity zones was in 2017. It has only been around for a couple years.
How do you know that it is an opportunity area?
The Washington State Department of Commerce has a map of all the Opportunity Zones in Washington State
Where can you find that map?
On the website for the Washington State Department of Commerce.
Anybody can do that?
Anybody can find the map and anyone can buy a property in those zones but if you don’t have any capital gains you need to offset it doesn’t necessarily make any sense.
When you’re trying to avoid capital gains, it’s attractive. If you have a capital gain that you’re going to have to pay taxes on, you can buy a property in an Opportunity Zone and defer that capital gain so you don’t have to pay it now and if you hold the property for a number of years the longer you hold it you can actually reduce your capital gain.
When do you pay taxes for Capital Gains?
The year they are earned. For example, if you sold a property in 2019 and you earned $500,000 in capital gains, you’ll have to pay on that capital gains, typically 20%, when you file taxes for that year.
Where can we find a table of taxes related to capital gains?
You can find it on the IRS website, just search for “IRS capital gains chart” and it will show you a table.