Kukui’ula is located in South Shore Kauai’s certified Opportunity Zone, allowing Qualified Opportunity Funds to invest in the residential community.
The Opportunity Zones Program
According to the IRS, over 8,700 Opportunity Zones in all 50 states were added to the US tax code as an economic development tool, designed to spur economic growth and job creation, by providing tax incentives to taxpayers. There are two certified Opportunity Zones on Kauai. The other zone includes Hanalei and Haena on the North Shore.
Qualified Opportunity Fund
A taxpayer may defer paying tax on unrealized capital gains by investing those gains in a Qualified Opportunity Fund within 180 days of the sale or exchange of the stock or property. The tax payment is deferred until the earlier of:
- the date the investment is sold or exchanged, or
- December 31, 2026
Any taxpayer may create a Qualified Opportunity Fund for the purpose of investing in Opportunity Zones and the fund is self-certified by following IRS guidelines.
Opportunity Zone Real Estate Investments
Real estate investments must include substantial rehabilitation, doubling the basis within 30 months. For example, if the Opportunity Fund invests in a $950,000 Opportunity Zone vacant land purchase, at least $950,000 in improvements must be invested in the land within 30 months of its acquisition. The improvements may be financed.
NOTE: If the Opportunity Fund invests in property with existing improvements, the land is excluded when applying the substantial rehabilitation rule: Only the value of the buildings needs to be doubled.
The improved property must then be used in an active conduct of business, for example, renting of the property. Kukui’ula currently offers a variety of vacant homesites with 7-day, 30-day, and 6-month rental home privileges, depending on the neighborhood.
Kukui’ula’s Kaulu Neighborhood
Three Tax Incentives – Deferral of Taxes, Reduction of Taxes, Cancellation of Taxes
If the Opportunity Fund investment is held longer than 5 years, there is a 10% exclusion of the deferred gain. If the investment is held more than 7 years, the exclusion is 15%.
If the taxpayer holds the investment in the Opportunity Fund for at least 10 years, the taxpayer is eligible for an increase in basis of the Opportunity Fund investment equal to its fair market value on the date that Opportunity Fund investment is sold or exchanged.
Any appreciation on an Opportunity Fund Investment is tax-free if held for more than 10 years.
A 60-day comment period for Proposed Regulations was issued by the IRS on October 19, 2018, and the December 31, 2026 date is expected by some to be revised to dove-tail with the 10-year rule. In the interim, investors are to rely on proposed rules to start investing.
It will be interesting to follow the IRS publications as the department interprets 26 USC section 1400Z-2 applications developed by tax specialists. Please contact your tax specialist to determine how these new tax incentives may possibly work for you.
Kaulu Neighborhood Lot 61 currently offered at $895,000 includes Kukui’ula Design Review approved plans