Opportunity Zones have been in the news a lot lately. In fact, these zones are opening up at a rapid rate across the country. They can best be described as tax incentive for investors that also could be a boon for sellers and struggling communities.
But not everyone is up to speed on what an Opportunity Zone (OZ) is and what it offers. That includes real estate agents and their clients. Robert Anderson, a Commercial Senior Associate in our La Mesa office, has been working with potential investors in the city of El Cajon, which has almost entirely been designated an OZ. We talked to Robert about why someone might want to invest in an OZ. In addition, we’re providing home background on what an OZ is and the benefits it can provide.Opportunity Zones can best be described as tax incentive for investors that also could be a boon for sellers and struggling communities. Click To Tweet
“Investing in an Opportunity Zone offers a tax benefit that, in return for rolling over the profits from the sale of a qualified property, lets you defer some or all of your capital gains (a profit from the sale of property or an investment) through 2026,” Robert says. “I’m currently involved with a fund that allows investors to participate in their fund that would finance a commercial property. Then they as a group would receive the benefits of investing in the OZ. This QOF is a twist on a REIT (real estate investment trust) or TIP (turnkey investment property). But first we have to find the right property big enough to invest in and rehab. It’s taking some time, and I’m still working on it. But there are huge opportunities out there for those willing to put in the time.”
According to the Internal Revenue Service, an OZ is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state, and that nomination has been certified by the Secretary of the U.S. Treasury via his or her delegation of authority to the IRS.
OZs are an economic development tool. They are designed to spur economic development and job creation in distressed communities. They were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. The first set of Opportunity Zones, covering parts of 18 states, were designated on April 9, 2018. They have now been designated covering parts of all 50 states, the District of Columbia, and five U.S. territories.
“Six months ago, few even heard about OZs,” Robert says. “I went to the city planning department to ask about a particular property, and they had no idea what I was talking about. It appears to be news even to city planners.”
They do so by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF–an investment vehicle that is set up as either a partnership or corporation for investing in eligible property located in a Qualified Opportunity Zone) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than five years, there is a 10% exclusion of the deferred gain. If held for more than seven years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least 10 years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
“This is a huge benefit for investors,” Robert says. “The fund I’m working with is fairly large but needs to be right. If it goes as planned, it will be a lot of fun once they start buying.”
No, residential property also qualifies if it is in an OZ. However, most properties to qualify in an OZ so far have been commercial.
No. You can get the tax benefits, even if you don’t live, work or have a business in an OZ. All you need to do is invest a recognized gain in a QOF and elect to defer the tax on that gain.
Yes. The list of designated Qualified Opportunity Zones can be found in IRS Notices 2018-48 (PDF) and in 2019-42 (PDF). Also, a visual map of the census tracts designated as Qualified Opportunity Zones is available here.