by Simon Black
Yesterday, I was looking at commercial properties for an Opportunity Zone investment… and one project in particular is really attractive.
The building itself is inexpensive– only a couple of million dollars to buy it and a few more to renovate.
Frankly, for a large spacious office building in one of the best neighborhoods in the city, that’s really cheap.
And the projected yields are in the double-digits.
Lately, there have been lots of developments in Puerto Rico. There are a lot of new businesses moving here thanks to all the various Puerto Rican tax incentives.
We’ve talked about these before.
Qualifying business owners in Puerto Rico can pay just 4% tax on their corporate profits, and investors can generate unlimited amounts of qualified investment income tax-free.
And because there are so many people moving to the island to take advantage of these incentives, there’s lots of opportunity for development.
Just up the road from where I live, there’s another billion-dollar, master planned, beachfront community with houses, condos, schools, grocery stores, gyms, marinas, etc.
It’s going to be an enormous project that caters to all the people moving here.
And driving up the highway into town yesterday, I passed a number of construction sites where a Chinese company has taken over several decaying buildings and is re-developing them.
It’s clear to me that all these tax incentives are working. They’re creating a lot of jobs and revitalizing neighborhoods.
Much of this is happening in Opportunity Zones.
We’ve discussed Opportunity Zones before— it’s a fairly new incentive that was created in the 2017 US tax reform.
The idea is simple: taxpayers are able to roll their capital gains into qualifying investments in specially designated “Opportunity Zones.”
So let’s say you bought Apple stock a long time ago, and now just recently sold it. In the process, you made a $250,000 capital gain.
Congratulations. You now have the choice to roll that $250,000 into an Opportunity Zone fund.
The tax benefits are pretty substantial. Right off the bat, you won’t have to pay capital gains tax on the sale of your Apple stock for up to seven years.
The big benefit, however, is that any additional gains you make through the opportunity zone fund (as long as it’s a qualifying investment that stays in the fund for at least ten years) is completely tax-free, forever.
This is a great way to incentivize long-term thinking… and it’s a win-win for everybody.
There are a lot of different investments that qualify. You can develop real estate, office property, industrial property, invest in a business, etc.
And if you’re an entrepreneur, you can even start your own business in an opportunity zone, sell it in ten years, and pocket all the gains tax-free.
It’s important to note, however, that while capital gains are tax-free, cash flow is taxable.
So if you invest in real estate and generate rental income, for example, the profits from the rental income will be taxable (but the gains when you sell will be tax-free).
Opportunity zones are found in every state in the US. State governors were allowed to designate 25% of their state as opportunity zones.
Puerto Rico received a special exception, so almost the entire island is an opportunity zone.
But the benefits in Puerto Rico are even better. Earlier this year, the Puerto Rican government passed additional incentives for opportunity zones.
First, they fixed the tax rate on net income from opportunity zones (like rental income) at 18.5%.
However, it’s possible to reduce this even further down to 4% by combining with some of Puerto Rico’s other incentives (depending on the type of business that you start or invest in).
The second incentive is that interest payments that come out of an opportunity zone are tax exempt.
This is particularly interesting for foreigners who can now loan money to a Puerto Rican opportunity zone fund, and receive their interest payments completely tax-free.
But the third incentive is really the most compelling: the government is offering a 25% tax credit that is completely transferrable.
This one is fantastic… and I didn’t even know it existed until yesterday.
The tax credit means that if you invest $400,000 into an opportunity zone business, the Puerto Rican government will give you a $100,000 credit to reduce future taxes elsewhere.
And if you have no taxes to offset, you can sell that tax credit to someone else.
In this way, you could develop a piece of real estate in Puerto Rico, sell the property later to someone else, and include the tax credit to fetch an even higher price.
Tax credits are super valuable, making this a really compelling perk on top of an already compelling tax incentive.
For entrepreneurs, Opportunity Funds are a no-brainer way to start a business.
You can start a business in any opportunity zone (which are everywhere), and get access to billions of dollars from long-term investors that are just waiting to invest in opportunity zones.
And for investors sitting on capital gains who can afford to think long-term, the benefits are obvious.
And as I showed earlier, you can still benefit from these incentives even if you’re not a US taxpayer.
While opportunity zones exist everywhere in the US, Puerto Rico has really doubled down on these incentives to make them even better.
And this is on top of the existing incentives (like 4% corporate tax and 0% tax on investment income) that make Puerto Rico one of the best tax jurisdictions in the world.
It would be foolish to think that all of these incentives will last forever… so I’d definitely encourage you to give this some very strong consideration while these options are on the table.