Comment by Rebelgecko | Hacker News Reader

Comment by Rebelgecko | Hacker News Reader

I believe the way that the program works is you can defer taxes from your original capital gains (and the cost basis gets increased so your deferred taxes are less than you would pay otherwise), reinvest them in an "opportunity zone", and not pay capital gains on your investment on the opportunity zone, if you hold it long enough

e.g. Bob bought Apple stock for $50 a share back in the day, and sells it for $200/share. He defers his taxes until 2026. Instead of paying capital gains tax on $150/share, the cost basis is adjusted by 15% so in addition to benefiting from the time value of money, future Bob will only be taxed on $142.50 of capital gains. Bob can buy a house in an "opportunity zone" (from scrolling around the embedded map, there's plenty of million dollar+ houses in these areas. There's also lots of sports teams and stadiums in these areas, so maybe Bob buys an NFL team or a parking lot next to their stadium), rent it out for 10 years, sell it, and not have to pay any capital gains tax on the appreciation. Definitely not a bad deal for him!

Close - but Bob in your example also has to improve the basis of whatever he buys by 100% within a 30 month period. So that could be a major renovation of the house, building another unit on the property, scraping and rebuilding etc.

Unfortunately it's not as easy as parking money and riding off into the tax free sunset. As I mentioned down thread, we should hopefully have the first set of regs from Treasury even as soon as tomorrow which will clarify a lot of the loose ends as written in the initial legislation.

Some of what we're waiting to see is whether or not that basis improvement includes the land value or if you can split that out. If the home Bob purchases for $300k is on a lot worth $250k, does he have to spend the full $300k to improve it, or just $50k to improve the basis of the structure?

Lots of details to still work out but hopefully we'll know more shortly.

Isn't that kinda a value-neutral proposition for the area though? Yes, there's a nicer house or whatever now, but 100% of the value add goes to the person who is now going to sell the property and get their investment back with change. The area ends up with the same effective wealth, since they have to send money to the out of state investors to claim ownership over the renovated house or whatever.

(also that assumes the people ever sell it to someone in the area - if we're talking real estate, there's no reason for them to not just sit on it forever and turn it into a rental or Airbnb or whatever)

Increases the tax base.

The benefits are not purely monetary - raising the quality of an area due to investment that otherwise would never come in is an enormous benefit for people already living there.

That isn't too say throwing money at a bad neighborhood is guaranteed to succeed but it gives a far better shot than letting the area simmer in stagnation.

I don’t think most people living in these “opportunity zones” are going to be happy with people basically being tax incentivized to make housing more expensive in the area in which they live, thus making life harder for them.

AFAICT this is basically incentivizing gentrification.

all of the above.

If you improve a mansion to be a fancier mansion, you don't increase the supply of housing.

If you improve a small lot to be a duplex or an apartment complex, you increase the supply of housing.

The latter wouldn't raise the net price of housing, but would still be a worthwhile investment. It depends on what local policy is, namely if building new housing is illegal or not.

Making one house fancier definitely increases rents on neighboring properties. If I live in a rundown house in a nice neighborhood and fix it up, everyone else's house increases in value. Same goes for making 1 house really nice in a bad area.

It is complex and there are many "it depends". If they own a house and want to move [for some personal reason] they will be happy that they can get more for their house. If they have lived there for years and watched the neighborhood go downhill they may be happy that things are improving again. Of course the other side is if they are happy with cheap rent they will be unhappy if rent increases because there is now more demand.

No, because it ends up increasing property values for existing owners.

"Wealth grows wherever men exert energy," Arkad replied. "If a rich man builds him a new palace, is the gold he pays out gone? No, the brickmaker has part of it and the laborer has part of it, and the artist has part of it. And everyone who labors upon the house has part of it Yet when the palace is completed, is it not worth all it cost? And is the ground upon which it stands not worth more because it is there? And is the ground that adjoins it not worth more because it is there? Wealth grows in magic ways. No man can prophesy the limit of it. Have not the Phoenicians built great cities on barren coasts with the wealth that comes from their ships of commerce on the seas?"

-- The Richest Man in Babylon

OZs are the Wild West right now... There is no clear guidance on what is allowable and what is not. If you want to invest through this mechanism, it may be better to hold off or the IRS may come knocking on your door in a few years.

Buying real estate for personal use would seem like undermining the spirit of the OZ legislation. I don't think it will fly...

But isn't the IRS knocking in a few years better than the IRS knocking THIS year?

IANAL (or a CPA), but it seems like a good-faith attempt to invest in an OZ should not incur penalties later. Disclaimer: you are taking about the IRS, so logic/fairness may not apply.

Also: why would personal investment be against the spirit of the OZ legislation? It seems to focus on getting the property developed, not why it is developed.

> But isn't the IRS knocking in a few years better than the IRS knocking THIS year?

This depends on the penalties that the Service/Treasury aims to collect and their ability to tie-up and/or seize one's assets.

> But isn't the IRS knocking in a few years better than the IRS knocking THIS year?

There's a 3rd option: How about the IRS knocking never? I say that in jest as I know you have a 1:3 chance in getting audited just through the normal course of business. I suppose it depends on your risk tolerance.

Yes its more akin to a 1031 exchange, but opened up so that non-real estate capital gains are eligible.

Is it just capital gains? Wondering if it applies to any other forms of active or passive income.

How are profits from these investments treated?

Can you "swap til you drop" like with a 1031 exchange?

> Is it just capital gains? Wondering if it applies to any other forms of active or passive income.

I would also like some information about this.

+1 for investing in distressed areas; self-nominated with intent or otherwise.

If it's capital gains only, -1 on requiring sale of capital assets in order to be sufficiently incentivized. (Because then the opportunity to tax-advantagedly invest in Opportunity Zones is denied to persons without assets to liquidate; i.e. unequal opportunity).

Q: "Why don't I get the same tax-advantage for investing in a/my opportunity zone community?"

A [AFAIU]: "Because you don't have capital gains; only regular income" (~="Because you're not an accredited investor")

weird the UK VCT's EIS and SIS are open to anyone with the cash

The current understanding is that you can continue investing so long as your money stays within a qualified opportunity fund. You have to make a substantial investment in the property or business, so simply buying land within an OZ won’t cut it. As a real estate developer, I can develop apartments, sell them upon stabilization, and redeploy that capital in another OZ investment.

Here's how it works with a few examples: https://ofn.org/sites/default/files/resources/PDFs/Opportuni...

This sounds like a surefire way to astronomically increase inequality, right?

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