The Tax Advantage of Opportunity Zone Investments in Puerto Rico

How to defer your 2018 capital gains taxes while generating an ROI as high as 20% (or more).

If you have generated a substantial capital gain from your investments in 2018 - congratulations!

However, you may also be dreading the huge tax bill that’s coming your way.

The good news is that the introduction of Opportunity Zones by the Tax Cuts and Jobs Act in December 2017 can provide you with the perfect investment vehicle to defer that capital gain tax while using the funds from such gain to invest in high-growth opportunities.

What’s an Opportunity Zone?

An Opportunity Zone is an economically-distressed community that has been nominated for the designation by the state governor and certified by the Secretary of the U.S. Treasury via its delegation authority to the Internal Revenue Service.

The goal is to incentivize much-needed investments into housing, small businesses, and infrastructure in economically-depressed areas.

The creation of Opportunity Zones allows U.S. investors to defer all 2018 capital gains for 8 years if the profits are reinvested in an Opportunity Zone) and also provides an exemption from capital gains tax on all future capital gains on the invested funds if an investment is held for 10 years, starting in 2018.

Opportunity Zone Map
US Map of Opportunity Zones

Benefits of investing in an Opportunity Zone

Investors only have to reinvest the gains instead of the entire proceeds from the sale of an asset to take advantage of the tax benefits.

The new regulations for Opportunity Zones also allow taxpayers to defer gains from a sale of any asset, such as gains from the sale of stock or an investment property.  Previously this was limited to capital gains made within a qualified zone.

The types of businesses that are eligible for Opportunity Zone benefits are more wide-ranging compared to many previous incentive programs and include investments such as residential rental property businesses, which typically pose lower risks for investors.  

Therefore, one of the most practical strategies to take advantage of this tax bill is to buy older buildings in Opportunity Zones, renovate them at a reinvestment cost that is greater than or equal to the purchase price, and then manage the building as a rental property.

Puerto Rico: An Opportunity Zone with tremendous potential

The IRS recently announced some changes to the Opportunity Zone regulations. As a result, almost the entire territory of Puerto Rico is now designated as an Opportunity Zone.

Opportunity Zone Map Puerto Rico
Puerto Rico is almost entirely zoned as an Opportunity Zone

As such, investing into qualified projects in Puerto Rico, which is part of the U.S. and is therefore protected by the same property rights and other legal regulations as are applicable in the mainland, is now a highly strategic investment for minimizing capital gains tax for investors who plan to keep their reinvested capital within the territory.  

As a U.S. territory, Puerto Rico enjoys legal and economic benefits that are not available to the neighboring Caribbean islands.

Unlike other Opportunity Zones in the continental U.S., Puerto Rico offers unique opportunities for investors.

A history of debt crises and fiscal mismanagement, coupled with recent natural disasters, has resulted in market conditions in which investors can acquire prime real estate in Puerto Rico at a bargain price.

Also, since it’s easier for U.S. citizens to travel there, it has an increasingly robust tourist industry.

Meanwhile, the use of US. dollars minimizes the currency risks.

In addition, the real estate prices in Puerto Rico are substantially lower than properties with the equivalent characteristics.  

You can find beachfront properties for 50 – 75% less than the cost in Miami and historic old city buildings for almost half the cost of the old city in Cartagena.

With a low acquisition cost and a sound vacation rental market, total returns for real estate investment in Puerto Rico can be as high as 15% to 20% prior to taking into account the benefits available under the Opportunity Zone legislation.

Example: Earning over 1000x the original capital by investing in an Opportunity Zone

Many crypto investors have experienced substantial capital gain over the past few years. For example, an investment of $10,000 in Bitcoin in 2010 would have yielded $4,094,400 if the bitcoins were sold at their peak - representing a capital gain of $4,084,400 for the 2018 tax year.

Let’s say this example investor is a single filer living in New York City. The profit of $4,084,400 will result in a capital gain tax of $1,428,895 at an effective tax rate of 36.5%.  

This 36.5% effective tax rate is comprised of U.S. federal rate of 20%, NIIT (net investment income tax) of 3.8% (single filer with cap gains above $200k), New York State tax of 8.82%, and New York City local tax of 3.84%.  This translates into over $1.4 million handed over to taxing authorities!

What can you do to defer the tax payment and keep more money in your pocket?

Instead of selling your Bitcoin, paying up to 36.5% of the profits in the form of taxes, and stashing the net balance in your bank account (just to watch the money depreciate!),  you can make a real estate investment in Puerto Rico and take advantage of the Opportunity Zone tax benefits.

Option 1: Take cash now and pay 2018 US taxes

Let’s go back to our example: instead of selling the Bitcoin, our investor can invest the $4,094,000 value in a Qualifying Opportunity Zone Fund.

Option 2: Reinvest capital gains into Lifeafar Opportunity Zone Investment

Let’s say he or she invests in the Lifeafar Plaza Colon Puerto Rico Project, which has a projected annualized IRR of 15.4% for investors.

If the investor rolls over his original investment plus earnings ($4,094,000) from the sale of his Bitcoin in the Opportunity Zone Fund, holds the asset for 10 years, receives net rental incomes of $4.5 million over such period, and sells the entire asset in 10 years, the total proceeds on the sale will be approximately $7.8 million.

After 10 years, the investor only pays 85% of the original capital gains taxes on the Bitcoin sale and zero capital gains tax on the Opportunity Zone investment.

Lifeafar Opportunity Zone Investment (Before Tax)
Lifeafar Opportunity Zone Investment (After Tax)

Now you may wonder, how does this strategy compare to investing in the U.S. stock market?

If we use a historical average return of the US stock markets of 7% and our example investor uses his after-tax income to purchase stock, he would have netted a total of $3.7 million in 10 years.

That’s $7.4 million less than investing in the Lifeafar Plaza Colon Puerto Rico Project opportunity fund.

Projected 10-Year Returns: Lifeafar vs. US Stock Market

In just 10 years, investing in the opportunity fund yielded our example investor over 1000x of his original $10,000 capital!

A not-to-be-missed investment opportunity

Here at Lifeafar, we’re excited to be negotiating several multi-million dollar real estate deals in Puerto Rico. These projects are the perfect investment vehicles for anyone with capital gains to invest in an Opportunity Zone.

These investments in Old San Juan will be converted into hotels and vacation rental properties to benefit from the booming tourist economy on the Caribbean island.  

Want to find out more? Join us on November 13-14 in San Juan, Puerto Rico for the Lifeafar 2018 Investor Conference.

We’ll be announcing these amazing deals, showing you how to achieve an 15% - 20% return on your investment plus additional returns for Opportunity Zone investors, and how to get qualified for 0% personal tax or just 4% corporate tax.