Opportunity Zones, the newest community development program using tax incentives was introduced in 2017 as part of the Tax Cuts and Jobs Act. This is the latest tax incentivized real estate program since the New Markets Tax Credit Program in 2001. So, what is all the excitement over this new program? Well, it allows investors to deploy capital gains in areas that are economically or financially deprived. In return, equity holders in these properties will have the opportunity to defer taxes and possibly reduce tax liability on the realized gains.
In this article, DRU will cover the following topics:
- How are areas designated as Opportunity Zones?
- How to invest in an Opportunity Zone.
- The tax incentives for investments in Opportunity Zones.
- Examples of how OZ’s work.
- The Impact of Opportunity Zones
Continue reading the first part of DRU’s Opportunity Zone series to get a better understanding of OZ’s and how they work. Over the next month, DRU will be releasing another article with more information covering OZs.
How are areas Designated as Opportunity Zones?
Governors will determine which low-income community census tracts qualify as an Opportunity Zone. This approach was intended to help ensure local needs and opportunities are being met as well as to encourage concentration of capital in targeted, geographically contiguous areas in each state or territory.
Here is a map of designated qualified Opportunity Zones. This was last updated in August of 2018, if you’d like more information on investing in an OZ or would like to inquire more about the locations offered please contact Del Rey Urban.
They are experienced investors in OZ and have multi-family assets across the nation in these zones.
Contact Del Rey Urban
How To Invest in an Opportunity Zone
To qualify for tax incentives, opportunity zone investments must be made through a qualified opportunity fund, which can be established as a partnership or corporation. After selling or exchanging an asset, the taxpayer rolls over cash equal to its gain for an interest in the fund. The fund then has to own a qualified opportunity zone property, which is either another corporation or tax partnership that runs a qualified opportunity zone business, or the fund invests in the qualified assets directly.
An investor could look at the opportunity like this:
Investments are made through a special purpose vehicle called an “opportunity fund.” These funds must certify twice each year that 90% of their assets are held in an opportunity zone. Capital gains must be rolled into an opportunity fund within 180 days of the realized gain to maintain compliance. (Source: CRBE)
The Tax Incentives for Investments in Opportunity Zones
Investors can break down the tax incentives into two separate parts:
- Investors are eligible until 2026 to use capital gains that funded the investment in the opportunity zone for tax deferral. In addition, a reduction in taxes on investors original gains are also possible depending on the length of time invested.
- If an OZ investment is held for a minimum of 10 years, investors can have all gains generated from the OZ tax-free!
Examples of how OZ’s WORK
Suppose you bought stock for $1 million, later sold it for $11 million and rolled the entire $10 million gain into an OZ investment.
- Taxes on the $10 million capital gain can be deferred until 2026.
- If invested for at least five years at the end of 2026, capital gains tax liability is for only $9 million (10% step up in basis).
- If invested for seven years at the end of 2026, capital gains tax liability is for only $8.5 million (additional 5% step up or 15% total).
- If OZ investment is sold for $20 million, generating another $10 million gain, the new gain would be tax-free if sold after a hold period of at least 10 years. (Source: CRBE)
The Impact of Opportunity Zones
With the OZ program still in its beginning stages, it is not yet clear how this will affect the real estate market in whole. DRU currently manages and operates various investment funds, including their Opportunity Fund II. DRU launched Opportunity Fund II after successfully opening and closing their Opportunity Fund I. In Opportunity Fund I they successfully exceeded investor expectations by delivering returns in the high teens over its 36-month term. If done correctly with the right advisement or fund, investors can expect notable gains with great tax advantages.
Del Rey Urban has a branch of esteemed real estate investment specialist working on opportunity zones and ensuring investor expectations are met. If you’re interested in learning more about DRU and their investment opportunities please contact firstname.lastname@example.org or visit their website at www.delreyurban.com.