We are now in the land of opportunity zones
Special to the
We start this column out by saying that everything written here needs to be discussed with your accountant or financial adviser before you talk to your Realtor.
Thousands of people build wealth through ownership of real estate and defer or avoid paying income taxes on it. All of this is legal under the IRS code, but there are rules you must follow. The rules drastically improved in 2017 for the Mahoning Valley. The question is “Can we leverage it to make things better here?”
Let’s start with your home. If you buy a home and live in it as your primary residence for more than two years, when you sell it you can make up to $250,000 profit tax free. If you are married, this can be as high as $500,000 for a couple filing together. Let’s face it: Unless you own a street corner with a traffic light in a semi commercial street, that isn’t likely in the Mahoning Valley.
If you own a “business property,” there are even greater opportunities. Let’s define a business property. A residential home that you are renting out is a business property, and so is farmland that has crops or livestock on it. A commercial building, apartment building or land with a gas well on it are considered “held for business use” and all have an interesting niche in the IRS code that allows them to be sold or “traded” without paying income tax on the profits.
IRS Code section 1031 allows property held for business use to be sold and the income taxes on the profits deferred (not paid) if the seller then purchases another “business use property.” If you own a rental home you purchased for $40,000 and you get an offer to sell it for $60,000, if you purchase another “business-use property” for $60,000 or more, no income taxes are due. Sell the rental home and buy an apartment, strip plaza or vacant land that a farmer is renting and pay no taxes.
President Trump’s Tax Cuts and Jobs Act of 2017 offers a massive opportunity for the Mahoning Valley. The act creates “Opportunity Zones” (O Zones for short) that allow people with large capital gains to defer and reduce the capital gains taxes by investing their gain into real estate located in an O Zone. Much of Warren from state Route 45 and the bypass, south through the town, roughly following the Mahoning River through Niles and Youngstown are in an O Zone. The rational is that instead of the government collecting a tax and doling it out, investors are offered incentives to invest in limited areas. Those properties offer a current and future tax break for investors and funnel investment to areas that need it most.
This is where you need a talented Realtor who has done 1031 Tax deferred exchanges and a commercial agent who understands O Zones. This is not a rookie’s adventure, only skilled professionals should be consulted. Do it wrong and you lose the tax deferment — period. You need advice from your accountant and will need to work with a Title Attorney familiar with 1031 exchanges and O Zones. But for real estate investors, they are a valuable tool to build wealth for both the investor and the region while deferring or never paying income tax on the gain.
This article was provided by the Warren Area Board of Realtors.