Commercial real estate developers in the U.S. are eager to invest in opportunity zones (OZs), federally-designated areas where real estate investors can get a significant capital gains tax deferral. Sales in OZs were up 80% in the first three quarters of 2018, with no slowing down into 2019. Real estate funds specifically targeting OZs have also been raising billions of dollars. Here’s what you need to know about reaping the benefits:
Hotspots are included
A 2010 Census was used to select the OZs. As a result, many neighborhoods that have already attracted a flurry of development over the past eight years were included. 75% of the OZs are within dense urban areas, such as LA’s Arts District.
Invest through a Qualified Opportunity Fund (QOF)
Investments must be made through a QOF to qualify and can be created with the intention of purchasing a single or multiple assets. Funds can be used directly, to purchase or improve property, or indirectly, to acquire equity interests in partnerships or corporations.
The tax break is greater the longer a property is held
Investors holding a property for five years or less can defer taxes on gains from the sale of their original asset either until that investment is sold, or at the end of 2026. Assets held for five to seven years have their capital gains taxes reduced by 10 percent, seven to ten years reduced by 15 percent, and over 10 years have all capital gains taxes forgiven. The goal is that this will encourage meaningful interaction between investors and communities.
Continued investment is required
Investors are required to invest as much capital as they acquired for their OZ projects. Additional capital to develop the project must be invested during any 30-month period.
The deadlines are tight
When an investor sells an appreciated asset, gains must be reinvested into a QOF within 180 days from the date of sale when investing directly.
When investing indirectly, the 180-day period begins on the last day of the partnership’s taxable year in which the gain was realized, which allows for more flexibility. All QOFs have until Dec. 31, 2019 to close on property within OZs for the opportunity to take full advantage of capital gains deferments.