If you're looking to real estate as a potential investment, you might consider Opportunity Zones. These are relatively new investment opportunities designed to help spur growth in economically disadvantaged communities across the U.S.
We'll take a closer look at real estate opportunity zones, where to find them and how you can decide if they're an appropriate investment for your personal goals.
What Are Real Estate Opportunity Zones?
An Opportunity Zone is a community development program that was established by Congress in 2017. The program is part of the Tax Cuts and Jobs Act.
Opportunity Zones were developed to encourage long-term investments, like housing projects, in low-income urban and rural communities nationwide. Specifically, they were created to revitalize distressed communities with private investments, rather than taxpayer dollars.
People who invest in Qualified Opportunity Zones (QOZ) benefit from capital gains tax incentives that are only available through this program.
Over 8,700 Qualified Opportunity Zones have been designated in the U.S. and U.S. territories.
How Does the Program Work?
Each state nominates a specific, low-income area as an Opportunity Zone. To qualify for nomination as an Opportunity Zone, the land has to meet the low-income requirements defined by IRS Code Section 45D(e).
That tract of land is certified by the Secretary of the U.S. Treasury, who then delegates responsibility for the land to the Internal Revenue Service (IRS).
Anyone who wants to invest in a QOZ would then file Form 8996. That allows an investor to create a Qualified Opportunity Fund (QOF).
Typically, that fund would be structured as a partnership or corporation to invest in the Opportunity Zones. The fund is required to hold at least 90 percent of its assets in that area.
Why Would I Invest in an Opportunity Zone?
The potential tax benefits are the biggest reason someone would invest in a QOZ. The investment will allow you to defer capital gains taxes, potentially until 2026.
Here's how that works. An investor uses the capital gains he earned on a prior investment to invest in a QOF. He won't pay taxes on those capital gains as long as he invests in the QOF.
If he keeps his investment in the QOF for five years, he will pay no taxes on 10 percent of his gains. If he keeps the investment for seven years, he won't pay taxes on 15 percent of gains. If he hangs on to it for 10 years, he pays no taxes at all on his gains.
What's the Goal of Opportunity Zones?
The idea is to make investing in low-income, distressed communities financially attractive to investors. The investors avoid paying hefty capital gains taxes.
Communities can attract development projects to help improve the quality of life for the people who live there.
You might not be a developer with millions of dollars to pour into a new apartment complex or shopping center. You can still invest in an established opportunity zone fund.
If you would like more information about real estate opportunity zones, please contact our office any time.