How can a federal incentive and the governor of Montana prevent you from paying taxes on a real estate investment?

Post Date: 12/09/2019

A low-income area investment might just mean big tax savings for savvy investors. Local organizations have been working to increase industry diversity while bolstering the drive to create more affordable housing in one of the places that you might not think needs that boost. Bozeman's Opportunity Zone is creating a much more attractive environment for investors that might just provide a giant payoff for all residents.

Bozeman is one of the newest “It” place to live due, in part, to unmatched access to world-class outdoor recreation, a low crime rate, fast and reliable internet for large scale users, and the amazing economic opportunities that dedicated Bozeman organizations and business people are pushing to create for all of us here. In a 1963 speech John F Kennedy famously touted, “A rising tide lifts all boats”, and if you’ve been paying attention to the business climate in our area lately you can definitely see that coming to fruition. Business is booming and with your neighbor’s success, your likelihood to see success rises too!

Bozeman’s Economic Growth and Development Committee has some very specific objectives to help further the success of those living and investing in the Gallatin Valley. The Bozeman Chamber of Commerce’s website lists those objectives as creating an economic development fund, finalizing the input for uniformed code rewriting, tax increment finance districts, targeted economic development, and other business development AND creating an opportunity zone. The 2017 Tax Cuts and Job Acts created treasury certified investment vehicles or, opportunity funds, to finance those opportunity zones, which in turn created the prospect for investors to take advantage of something that doesn’t really come along very often. Those zones create the potential for tax reduced or possibly tax-free real estate investment. Believe it or not, that type of transaction actually exists right here in Bozeman if you’re willing to make the investment and wait for a while.

The governor of every state has the ability to nominate these opportunity zones to jump-start investment inside low-income land tracts and after approval in May of 2018, a fairly sizable chunk of land south of Bozeman (19th/MSU Area, see attached image) became just a bit more enticing to real estate investors and developers. The idea behind this incentive is to provide tax breaks for investment into low-income areas. The median income within the boundaries of the land that was proposed by Governor Bullock was $28,000 at the time and includes much of Southwest Bozeman near the MSU campus. Industry growth and diversification is a huge part of that pie but so is creating more affordable housing for residents and that becomes easier to pencil with incentives that make sense for developers and investors.

As an investor in an opportunity zones patience will get you the payoff. Details on how to make a Qualified Opportunity Zone work for your portfolio of investment properties are not as complicated as one might think. The key to making it work for you means reinvesting the capital gains you’ve earned on a transaction back into the property within 180 days of the sale. Eligibility to defer your tax responsibilities on that investment can then be taken advantage of up to or until that investment is sold or December 31, 2026.

Partial tax forgiveness is available if the investment is held in the fund for a minimum of 5 years at which time only 90% of the original gain is taxed. If you can hold onto that investment for 7 years your tax liability on capital gains is reduced to 85% and if you have the stamina to outlast the 10-year mark, any tax on the appreciation of that investment is forgiven. Yes, that’s right, it’s forgiven.

This boost from the federal government and the governor’s office will undoubtedly make an enormous difference in the median income in Bozeman’s Opportunity Zone looking into the future. Dollars earmarked to improve lives and economic stability will be working to help all of Bozeman’s residents. Not only will the investors and developers looking for a sound financial venture be benefiting from the tax incentives offered here but residents and those moving to our area will see continued diversity and industry growth and more affordable housing options. The City of Bozeman will also be able to offer better managed and improved services due to additional impact fees and tax base growth from organizations interested in being a part of this amazing place we call home.