Real estate investors looking into new development should look in a Qualified Opportunity Zone. Here is what you need to know:
Why Were Opportunity Zones Created?
Tax provisions have been a focus within the real estate industry. As part of the Tax Cuts and Jobs Act passed in 2017, the opportunity zone program is providing federal capital gains tax deferral to investors who put money into some 8,700 depressed communities across the country. The purpose of this program is to encourage long-term investments in low-income urban and rural communities nationwide, to then, to receive favorable tax treatment for investing in Opportunity Funds that are certified by the U.S. Treasury Department.
The need for the program stems from the limited access to jobs in economically distressed communities, a lower level of business formation in certain areas across our nation, and accordingly, the need for diversification of high development through the United States. The structure of this program should help drive money into underdeveloped communities, generating economic growth and jobs. However, some critics have warned that the unequal opportunity zone selection could lead to some unnecessary tax breaks for larger investors or companies, such as Amazon. This company is receiving tax cuts as they develop their second headquarters in Queens, NY, due to this location being a qualified opportunity zone area.
Finance Real Estate Development
Many analysts believe that the pool of potential investors, along with the available amount of capital, for real estate development in the opportunity zone areas will increase dramatically within the next year resulting in a rise of new investor interest. This article is meant to advise real estate developers to act quickly to decide if their real estate developments qualify for investment in these zones. Consulting with legal and tax counsels to ensure proper eligibility for given tax breaks is recommended.
Requirements For Qualified Properties
In early October of 2018, the Treasury Department announced guidelines and rules that give investors enough certainty to begin investing in these zones. As each State's zone have been set, investment banks, venture capitalists and real estate developers have already put billions of dollars into new real estate funds targeting opportunity zones.
To be eligible for the benefit, investors must roll profits from the sale of stocks, bonds, real estate or other assets into a qualified opportunity fund. Qualified Opportunity Fund is an investment vehicle that is organized as either a partnership or corporation for the purpose of investing in qualified opportunity zone property that holds at least 90 percent of its assets in the property. The qualified opportunity zone business property must be:
- Designed as an opportunity zone
- Used in trade or business
- Acquired by purchase for cash after December 31, 2017
- Constructed after purchase of property (or must have ‘substantial improvements’ made to the property after purchase)
The rules also provided relief to real-estate developers, who had been concerned about the law's requirement that capital gains generally must be reinvested into the zones within six months after the prior investment is sold. That was a potential problem has been dismissed, so projects can begin to develop.
Benefits of Investing in Qualified Properties
Real estate investors in the zones have any potential benefits. First, they can roll capital gains from an unrelated investment into a zone and defer those capital-gains taxes until the end of 2026. Investors who invest by December 31, 2019 will be eligible to receive a 10% reduction of the taxable gain amount invested in Qualified Opportunity Zone Property if the investment is retained for at least 5 years, increasing to a 15% reduction if the investment is held for at least 7 years. If the investment is held for 10 years, the basis is stepped up to fair market value at the time of sale, and no capital gains taxes would be due. Once that investment is sold, investors will pay no tax on any capital gains realized when that investment is sold.
Where To Find Qualified Opportunity Zones
As stated on IRS homepage, the list of designated Qualified Opportunity Zones in which a Fund may invest to meet its investment requirements. Specially, this information can be found at Notice 2018-48.