Opportunity Zones – The Newest Rival to the 1031XC
Opportunity zones have been the latest hot topic in real estate, and for good reason. The recent Tax Cuts & Jobs Act (TCJA) has made it possible for investors to achieve tax deferred and even tax-free growth when they invest in economically distressed communities across the U.S.
So, What Are They?
Opportunity Zones are designated census tracts throughout the U.S. identified as low income or economically distressed communities. As a way of boosting these local communities, investors and businesses that establish businesses and/or infuse capital (from capital gains) in these areas have access to potential tax benefits, such as:
Temporary deferral of capital gains taxes on the money placed into the opportunity zone fund until 12/31/2026.
10% step up in basis on capital gains invested after 5 years in the fund
5% additional step up in basis on capital gains invested after 7 years in the fund
No capital gains tax on gains in the opportunity zone fund held for at least 10 years
Where Are They?
Fortunately, there are many maps available online that make it easier to search and find properties in opportunity zones. The city of Los Angeles has incorporated these into their current ZIMAS program (see snapshot below).
My Personal Notes:
Below are some of my personal notes on Opportunity Zones, as I try to figure how I want to incorporate this in my future. (Cannot say this enough ---I am only sharing this for general information so you feel the kick to talk to your own tax and financial team on how to use them in a way that works best for you):
Opportunity Zone Funds (OZF) are the investment vehicles to make acquisitions in Opportunity Zones
OZFs must be a corporation, a partnership, or an LLC taxed as a corporation or partnership
Can self-certify using Form 8996 with federal income tax return
Must put in capital gain funds into OZF to get ANY of the benefits
Don’t confuse “old gains” what is initially put in, with “new gains” what would be considered a gain on the sale of the OZ asset(s)
Must place property into original use (if no other taxpayer has already done so) or substantially improve the property within 30 months of acquisition (substantially being more than what I spent to purchase/acquire – aka $1 in per $1 spent)
Minimum 50% of total gross income must come from active conduct of a business
Must invest funds within 180 days of realizing capital gains
12/31/2026 is the deadline to invest in an opportunity zone and qualify for the benefits
Initial and annual reporting of 90-percent Asset Test
If I invest in an OZF by 12/31/2019 my deadlines are:
Why I like the Concept?
In my opinion, Opportunity Zones are just that an awesome opportunity for any business, not just real estate developers and investors. The law wants to encourage businesses as small as coffee shops to global tech startups to establish themselves in local low income communities and bring jobs, capital improvements, human and other social assets to and boost these areas. This is already a popular trend that we have seen nationwide from the Arts District in LA to Wynwood in Miami. Now, there's an opportunity to gain potential tax benefits from that.
NOTE: This article is for general information purposes only. This is by no means tax or financial advice. Talk to your own CPA, tax and financial advisers directly.
Law on Opportunity Zones: https://www.law.cornell.edu/uscode/text/26/1400Z-1https://www.law.cornell.edu/uscode/text/26/1400Z-2
Videos, Resources on Opportunity Zones: https://www.claconnect.com/resources/videos/2019/the-benefits-of-investing-in-opportunity-zones