Created as part of the 2017 Tax Cuts and Jobs Act, Opportunity Zones are designated economically disadvantaged areas that can offer powerful tax incentives to investors willing to deploy capital in them.
- An Opportunity Zone is “an economically-distressed community where private investments” — in other words, real estate development — “may be eligible for capital gain tax incentives,” according to the U.S. Economic Development Administration. Opportunity Zones are also referred to as Qualified Opportunity Zones, or QOZ.
- 1 What is an opportunity zone and how does it work?
- 2 What Means Opportunity Zone?
- 3 How do you buy a house in an Opportunity Zone?
- 4 Can you invest in opportunity zones in 2021?
- 5 What is the benefit of an Opportunity Zone?
- 6 What are the benefits of buying in an Opportunity Zone?
- 7 How do you qualify for an Opportunity Zone?
- 8 How do Opportunity Zones make money?
- 9 Can an individual buy a property in an Opportunity Zone?
- 10 How do Opportunity Zone funds make money?
- 11 Are opportunity zones going away?
- 12 How long do Opportunity Zones last?
- 13 How long do I have to invest in opportunity zones?
- 14 Opportunity Zones Frequently Asked Questions
- 15 Opportunity Zones In Real Estate: A Guide
- 16 What Are Opportunity Zones?
- 17 Where Are Opportunity Zones Located?
- 18 How Do Opportunity Zones Encourage Private Investment?
- 19 What Are Opportunity Funds?
- 20 What Are The Tax Benefits Of Investing In Opportunity Zones?
- 21 What Are The Benefits To The Opportunity Zones?
- 22 Opportunity Zones Are A Golden Opportunity For Real Estate Developers And Investors
- 23 How to Invest in Opportunity Zones and Avoid Capital Gains
- 24 Opportunity Zone Investing in Action
- 25 Tax benefits of investing in Opportunity Zones
- 26 What are other benefits of Opportunity Zone investing?
- 27 Using Opportunity Funds to invest in Opportunity Zones
- 28 Where are Qualified Opportunity Zones located?
- 29 How to Defer / Exclude Capital Gains Tax with Opportunity Zones
- 30 Common questions about real estate Opportunity Zone investing
- 31 The Bottom Line for Real Estate Investment in Opportunity Zones
- 32 A Guide To Investing In An Opportunity Zone
- 33 Qualified Opportunity Zones
- 34 What is the fundamental issue?
- 35 I am a real estate professional. What does this mean for my business?
- 36 NAR Policy
- 37 Legislative/Regulatory Status/Outlook
- 38 NAR Committees:
- 39 From NAR
- 40 Basics
- 41 Considerations
- 42 What You Need to Know About Opportunity Zones
- 43 What is the Opportunity Zones Program? — Multifamily.loans
What is an opportunity zone and how does it work?
An opportunity zone is a disadvantaged community where new investments, under strict conditions, may be eligible for tax incentives provided through the Tax Cuts and Jobs Act of 2017. The goal of this program is to encourage long-term investment in low-income neighborhoods.
What Means Opportunity Zone?
Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States. Opportunity Zones were created under the Tax Cuts and Jobs Act of 2017 (Public Law No. 115-97).
How do you buy a house in an Opportunity Zone?
In order to invest in an Opportunity Zone, you have to form an Opportunity Fund or invest in one that already exists. To qualify, 90% of the capital from the fund has to be invested in the Qualified Opportunity Zone. One of the things you can invest in and take advantage of the tax benefits for is real estate.
Can you invest in opportunity zones in 2021?
Investing in a Qualified Opportunity Zone in 2021 However, the “five-year, 10% basis increase” is still available for taxpayers through December 31, 2021.
What is the benefit of an Opportunity Zone?
Benefits of investing in opportunity zones Opportunity Zones offer tax benefits to business or individual investors who can elect to temporarily defer tax on capital gains if they timely invest those gain amounts in a Qualified Opportunity Fund (QOF).
What are the benefits of buying in an Opportunity Zone?
The program provides three tax benefits for investing unrealized capital gains in Opportunity Zones:
- Temporary deferral of taxes on previously earned capital gains.
- Basis step-up of previously earned capital gains invested.
- Permanent exclusion of taxable income on new gains.
How do you qualify for an Opportunity Zone?
A: To qualify as an eligible Opportunity Zone Business, a business must demonstrate that substantially all its tangible business property is located within a Qualified Opportunity Zone.
- Deferral of capital gains taxes.
- Reduction of capital gains taxes.
- Elimination of taxes on future gains.
How do Opportunity Zones make money?
Partnerships or corporations can establish Opportunity Zone Funds and then invest in a property located within a Qualified Opportunity Zone. These investment vehicles are designed to increase economic development and job creation in distressed communities, as well as offer tax benefits to investors.
Can an individual buy a property in an Opportunity Zone?
The answer is: “ yes… but.” You can buy anything in a Qualified Opportunity Zone (QOZ) and call it an “investment.” However, to ensure receipt of the QOZ program’s tax-deferral benefits, that house must meet several requirements.
How do Opportunity Zone funds make money?
An opportunity zone is an investment program created by the Tax Cuts and Jobs Act of 2017 giving tax advantages to certain investments in lower income areas. Qualified opportunity zone funds allow individuals to roll gains from any capital asset into under-invested communities and defer the income taxes until Dec.
Are opportunity zones going away?
December 31, 2028 — Expiration of the designation of Qualified Opportunity Zones. QOZFs may still be active after this date to receive the 10-year exclusion. Expiration should not have any effect on receiving this incentive.
How long do Opportunity Zones last?
Generally, you have 180 days to invest an eligible gain in a QOF. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain.
How long do I have to invest in opportunity zones?
To defer tax on an eligible gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt interest) within 180 days of realizing the gain. In general, if you don’t defer the gain, the gain would be recognized for federal income tax purposes the first day of the 180-day period.
Opportunity Zones Frequently Asked Questions
A26.Yes. In addition to the basis increase rules for sales of qualifying QOF interests held for at least ten years, the holder of a qualifying investment (with respect to that investment) may elect to exclude all gains and losses generated by the sale of assets by that QOF or certain lower-tier partnerships owned by the QOF from the taxable income of that investment. But only if all of the following conditions are met is it permissible to do so.
- First and foremost, it only applies to the portion of the investment that was a qualifying investment in a QOF partnership or QOF S corporation that the taxpayer held for a period of at least ten years
- And second, it only applies to the portion of the investment that was a qualifying investment in a QOF partnership or QOF S corporation that the taxpayer held for a period of at least ten years. Second, an election was made to remove from federal income taxation any of the profits and losses from the sales that are attributable to the qualified investment if the federal income tax return was submitted on time. This choice to exclude profits and losses can be made for each calendar year in which the QOF or certain lower-tier partnerships sell assets
- However, this election cannot be made more than once in a calendar year. Third, the gain from that sale was not derived from the sale of inventory in the ordinary course of a trade or business
- Fourth, the QOF must distribute (or be treated as making a distribution of) the net proceeds from the sales within certain time periods
- Fifth, the QOF must distribute (or be treated as making a distribution of) the net proceeds from the sales within certain time periods
- Sixth, the QOF must distribute (or be treated as making a distribution of) the net proceeds from the sales
Opportunity Zones In Real Estate: A Guide
As an investor in real estate, or basically anything, you want to be able to increase your profit margins as much as possible. If you have the opportunity to participate in community development, it is even better. With the advent of Option Zones, the tax code now gives you with the opportunity and incentive to accomplish both at the same time. This post will go through the fundamentals and benefits of Opportunity Zones, as well as why they could be worth looking into if you’re thinking about purchasing an investment property in the future.
What Are Opportunity Zones?
Opportunity Zones are defined as locations that have experienced considerable economic difficulties in recent years. Certain new investments in these locations may be eligible for a variety of tax breaks and incentives. Qualified Opportunity Zones (QOZs), which were established as part of the 2017 Tax Cuts and Jobs Act (TCJA), are intended to encourage investment in economically distressed areas by providing preferential tax treatment to investors in these areas. Governors propose communities, which are often located in low-income census tracts, to be considered for designation as Opportunity Zones.
The program is administered by the United States Department of Housing and Urban Development (HUD), which collaborates with a number of other federal departments.
We’ll have more information on them in a moment.
Where Are Opportunity Zones Located?
As of this writing, there are 8,764 Opportunity Zones located throughout the United States of America. In terms of population density, the locations range from densely populated metropolitan areas to suburban and rural areas. Check out the QOZ map provided by the Department of Housing and Urban Development to discover which regions are eligible for incentives under the program.
How Do Opportunity Zones Encourage Private Investment?
By offering a variety of tax breaks, the federal government is encouraging private investors to place their money in Opportunity Zones. Let’s go over them one by one.
Temporary Tax Deferral
If you invest in a Qualified Opportunity Fund, you may be able to avoid paying taxes on capital gains and gains on the sale of business property for a period of time (QOF). In either case, the deferral is valid until either the investment in the Qualified Opportunity Zone is sold or until December 31, 2026, whichever occurs first.
Generally, in order to qualify for the deferral, capital gains must be reinvested within 180 days after the date on which they are recorded as taxable income.
Step Up In Basis
It is possible to enhance the basis on which your property’s fair market value is computed for tax purposes if you hang onto your property in a Qualified Opportunity Zone for an extended period of time. Using this method, you can reduce the taxable gain connected with the sale of property located inside the designated zone. If you hold your QOF investment for at least 5 years, you will get a 10 percent increase in the base of your investment, according to HUD regulations. When your investment has been in place for seven years, the base of your investment has increased by 15 percent.
Consider the following scenario: you purchase a house for $300,000 and hold it for five years before selling it for $400,000.
If the property was owned for seven years, the basis would grow by 15 percent, and the taxable capital gain would be $85,000.
Permanent Exclusion From Taxable Income
You can deduct any appreciation on an investment in a qualified operating fund (QOF) if you hang on to it for a period of 10 years or more after making the investment. As a result, you will only be taxed on the amount of your initial investment, not anything else. A further 15 percent has been taken off because of the base increase. This provides you with a significant tax benefit and helps to make your investment even more profitable. Let’s look at a simple illustration. If you have a $500,000 capital gain that you invest in an opportunity fund that is later sold for $1.2 million, you will only be taxed on $425,000 of that gain.
The other advantage is that the additional gain of $700,000 from the opportunity fund investment is tax-free because it was kept for at least ten years before it was sold.
What Are Opportunity Funds?
Those funds that invest 90 percent of their capital in Qualified Opportunity Zones are referred to as opportunity funds, sometimes known as qualified opportunity funds or QOFs. Every six months, this standard is audited to ensure that it is still in compliance. In order to be deemed a qualifying investment, the Opportunity Fund must make investments in enterprises that operate in the opportunity zone’s geographical region. Examples of qualifying sorts of investments include stock purchases, participation in a partnership, and the acquisition of commercial real estate in the local region.
What Are The Tax Benefits Of Investing In Opportunity Zones?
There are several tax advantages available to investors and developers in opportunity zones, including:
- Until the earlier of December 31, 2026 or the time when your opportunity fund investment is sold, you can delay payment of taxes on the capital gain you invested. If you retain the invested capital gain in the opportunity fund for at least 5 years, you will get a reduced tax base of 10%, and you will receive an extra 5% if you keep it in the fund for at least 7 years, respectively. For as long as you maintain the capital gain invested in the opportunity fund for at least 10 years, only the initial investment is subject to taxation, and any appreciation on the investment is not subject to taxation. Capital gains can be invested in an Opportunity Fund to take advantage of tax benefits
- However, this is not recommended.
In order to better understand how this works from a taxation standpoint, let us go through three distinct scenarios. Suppose Joanna puts a $200,000 capital gain in a qualified opportunity fund and retains the investment for 5 years before selling it at a price of $250,000. After accounting for a 10% rise in the basis, she pays $46,000 in taxes at the maximum long-term capital gains tax rate. (0.2 x $180,000 + 0.2 x $50,000 = 0.2 x $180,000). The increase in basis results in a tax savings of $4,000 as a result of the change.
This indicates that, if all other factors remain constant, the tax payment would be $44,000 ($170,000 divided by 0.20 + $50,000 divided by 0.20).
If Joanna kept the property for 10 years or longer, she would pay $44,000 in taxes, but she would also realize a $56,000 tax savings, because not only is she saving 15 percent on her tax liability due to an increased tax basis, but the appreciation that has accrued since the initial investment is no longer subject to income tax.
Please take the time to carefully analyze your financial and tax status before pursuing any investment or tax avoidance scheme. Consult with a financial counselor and/or a tax preparation specialist for further information.
What Are The Benefits To The Opportunity Zones?
In order to improve places that are economically disadvantaged, Opportunity Zones and the Opportunity Funds that they generate are intended to attract private investors who will bring capital to bear and invest in the area. There are various possible advantages of doing so:
- Businesses locating or expanding in the region provide more tax revenue for the government. Additionally, if individuals relocate to the region in order to be closer to their places of employment, your residential tax base may increase. Tax monies collected in addition to those already collected might be utilized to improve infrastructure and services in the region. This, in turn, would assist to make relocating to the area more appealing for individuals who are considering doing so. From the standpoint of business or development, the tax incentives itself might make Opportunity Zones appealing targets for expansion. As a result of the tax advantages associated with investing, firms may have an easier time attracting cash from other sources.
Opportunity Zones Are A Golden Opportunity For Real Estate Developers And Investors
Investing in Opportunity Zones allows you to delay and possibly reduce the amount of capital gains tax that would otherwise be owing to the government. The best part is that if the property is retained for a period of 10 years, no tax is due on the increase in value of the property. In order to make an investment in an Opportunity Zone, you must first establish an Opportunity Fund or make an investment in an existing Opportunity Fund. Qualified Opportunity Zones are defined as areas where at least 90 percent of the capital from a fund is invested in a qualified opportunity zone.
The following post will provide you with the fundamentals of purchasing an investment property: If you’re ready to get started, you can submit an application for financing with Rocket Mortgage® today.
How to Invest in Opportunity Zones and Avoid Capital Gains
What it boils down to is that the Qualified Opportunity Zone (QOZ) program incentivizes real estate investors to put their money to work in low-income areas of the United States by providing large tax incentives, hence stimulating economic growth. The Qualified Opportunity Zone (QOZ) program was established by the Tax Cuts and Jobs Act of 2017, which was enacted by Congress. Real estate owners might decrease their previous capital gains tax obligation by investing realized capital gains in qualified operating zones (QOZs).
When compared to a standard real estate investment, these investment tax breaks provide investors with the ability to nearly quadruple their after-tax earnings on their investments.
We’ve got you covered.
Opportunity Zone Investing in Action
Let’s look at a case study to illustrate this point. Julie bought a tiny apartment building in her hometown eight years ago, and she has enjoyed it ever since. Although the property was undervalued when she purchased it, over the years it has provided her with a consistent and solid income flow as well as an almost doubled in value, much to her delight. She’s amassed a substantial amount of equity in the building and believes that, given the current state of the market, it could be a good time to sell.
Even though Julie is aware of her ability to employ a 1031 Exchange to postpone capital gains (she did so when she acquired her apartment complex), she is apprehensive about finding a like-kind replacement, particularly given the historically low cap rates for multifamily properties.
She continues her search for alternate real estate investments and comes upon the Qualified Opportunity Zone program, which she is interested in. The more she learns about investing in opportunity zones, the more she loves what she sees in the market.
Tax benefits of investing in Opportunity Zones
Julie was drawn to opportunity zone investment because it allowed her to defer existing capital gains taxes while also potentially avoiding fresh capital gains taxes. She learned that depositing her capital gains in a Qualified Opportunity Zone provided her with two significant tax benefits:
- Investments in Opportunity Funds have the potential to lower realized capital gains by 10% in five years and another 5% in seven years, with the possibility of deferring taxes for up to nine years. If you make a future capital gain on an opportunity fund investment and keep it in the fund for at least 10 years, you will be totally exempt from federal and state capital gains taxes.
What are other benefits of Opportunity Zone investing?
When compared to the empowerment zones and renewal communities programs previously authorized by Congress, opportunity zones provide four additional compelling incentives to real estate investors. These are as follows:
- Not all of the profits from a prior asset sale must be reinvested
- Only capital gains must be reinvested. The deferral of capital gains is available for transactions made outside of QOZs, in addition to those made within QOZs. Investing in Opportunity Zones is possible with any sort of capital gain – stocks, Bitcoin, precious metals, and more – and any amount of money. A range of QOZ possibilities, such as residential rental property, may be invested in through the establishment of Opportunity Funds by syndicators.
Using Opportunity Funds to invest in Opportunity Zones
As she conducted her investigation, Julie noticed that the word “Opportunity Fund” kept appearing on the page. She quickly understood that Opportunity Funds are the approved investment instrument utilized to make investments in Qualified Opportunity Zones, something she had not previously recognized. Qualified Opportunity Funds are defined by the Internal Revenue Service as partnerships or companies organized in the United States for the purpose of investing in qualifying property that is situated in a Qualified Opportunity Zone.
Where are Qualified Opportunity Zones located?
Following the passage of the Jobs Act in 2017, state governors presented low-income census tracts as Opportunity Zones to the United States Treasury and Internal Revenue Service. In 2018, about 8,700 Qualified Opportunity Zone designations were finalized. Opportunity Zones can be found in all 50 states of the United States, as well as in Washington, D.C., and in U.S. territory such as Guam, Puerto Rico, the Virgin Islands, and the Northern Mariana Islands, among other places. In addition to the prospect of delaying and permanently eliminating her capital gains from taxation, Julie was excited about the prospect of earning double-digit returns.
Despite the fact that her apartment complex had performed well, she was occasionally concerned about having so much money invested in a single asset.
It is possible that investing her capital gains in a Qualified Opportunity Fund will enable her to decrease risk by allowing her to diversify across several areas around the United States.
How to Defer / Exclude Capital Gains Tax with Opportunity Zones
As any savvy real estate investor would do, Julie used her newly acquired knowledge to conduct a fast calculation of how much capital gains tax she could save by investing her capital gains in an Opportunity Zone:
- When she sells her apartment complex, she will get a capital gain of $500,000
- With that $500,000 in an Opportunity Fund, her taxable capital gain would be reduced by 10% to $450,000 after five years, and another 5% to $425,000 after seven years, all of which would be tax-deductible. Nine years after making her initial investment of $500,000, she would be required to pay the lower deferred capital gains tax on her investment. After ten years, any gain in the value of her initial investment of $500,000 would be fully tax-free.
Julie took a deep breath and considered her options. The value of her apartment building had more than quadrupled in the previous eight years. It’s possible that her capital gains, which she has placed in an Opportunity Fund, could also double in value to $1 million over the following 10 years, resulting in an additional $500,000 gain that is fully tax free.
Common questions about real estate Opportunity Zone investing
Are there any restrictions on how long you may keep your capital gains in an Opportunity Fund? To be clear, the same 180-day time limit that applies to 1031 exchanges also applies to Opportunity Funds. What is the difference between a 1031 tax-deferred exchange and investing in an Opportunity Zone? The most striking similarity between 1031 exchanges and Opportunity Zones is that both can delay or completely eliminate capital gains tax. However, unlike a 1031 exchange, investing in Opportunity Zones is not subject to the same-kind restriction that applies to other types of investments.
Yes, investors have the option to invest more money than they expect to earn in capital gains.
What is the process through which an Opportunity Fund is established? There are no legal restrictions on who can establish an Opportunity Fund. Qualified funds must meet the following requirements:
- Be a legal entity established solely for the purpose of making investments in Qualified Opportunity Zone real estate
- It must have at least 90% of its assets – such as stock, partnership interests, or real estate – located inside the QOZ. To self-certify to the IRS as an Opportunity Fund, they must use Form 8996 and show that they have at least 90 percent of their assets in liquid assets.
What happens after that? The Internal Revenue Service (IRS) will hold a public hearing on proposed regulations for the Qualified Opportunity Zone programs in January 2019 and release additional rulemaking following the hearing.
The Bottom Line for Real Estate Investment in Opportunity Zones
The creation of Qualified Opportunity Zones provides real estate investors with a new method to delay – and perhaps eliminate – capital gains tax on their investment properties. There are 8,700 Opportunity Zones in every state in the United States and its territories – including Puerto Rico and the Virgin Islands – and they are located throughout the country. The official investment vehicle for investing in Opportunity Zones is known as a Qualified Opportunity Fund (QOF), which stands for Qualified Opportunity Funds.
Qualified operating funds (QOFs) can be used to invest in capital gains derived from the sale of any asset – including real estate, stocks and bonds, Bitcoin, and fine art.
Tax on the lower capital gain amount is due nine years after the reduction was made.
There are always nuances to iron out with every new government program, just as there are with any new government program.
A Guide To Investing In An Opportunity Zone
Tax breaks are available to persons who have made capital gains in opportunity zones. Any organization or individual can invest their unrealized capital gains in an opportunity fund, which is managed by a third party. There are several other types of Qualified Opportunity Funds that are created by active real estate investors, including partnerships, limited liability companies (LLCs), and corporations. The fund is responsible for filing all necessary documentation and adhering to IRS laws. It is necessary that the properties they invest in be either operational, abandoned, or underdeveloped, and the majority of them demonstrate considerable improvement within 30 days of being bought.
When investing in noncash property, it is possible that just a portion of the investment may be eligible for tax advantages.
Opportunity grants are used to sponsor a wide range of community activities and initiatives.
Commercial and industrial real estate, as well as infrastructure, companies, and homes, are all examples of this. The common denominator among these initiatives is that they are located in areas with extreme poverty and high unemployment rates, which makes them particularly appealing.
Qualified Opportunity Zones
- It was established in 2017 with the goal of promoting economic development in low-income areas as designated by the United States Census Bureau. Opportunity Zones qualify for tax breaks, including the exemption from capital gains tax if investments are made through an Opportunity Fund. The program is scheduled to end completely on December 31, 2047.
According to the 2017 Tax Cuts and Jobs Act, the Qualified Opportunity Zone (“QOZ”) program was established to foster economic growth in underprivileged regions by providing tax breaks to investors who use “Opportunity Funds” to invest in the Zones. This provides chances for real estate investment and growth in certain towns, in addition to providing tax advantages. In 2018, states and territories around the United States, including Washington, D.C., nominated regions to be classified as QOZs, and the Internal Revenue Service and the Treasury Department formalized the designations the same year.
- This is a transitory program, and it will be permanently decommissioned on December 31, 2047, at the latest.
- In the first place, capital gains reinvested into a QOZ within 180 days of the date of the investment are tax-deferred for up to nine years, until 2026.
- In addition, profits gained on investments in a QOZ are exempt from capital gains tax provided they are kept for a period of at least 10 years after the date of purchase.
- These funds must be self-certified and hold at least 90 percent of their assets in QOZ property (which includes stock, partnership interests, and/or tangible property used in a trade or business in a QOZ, such as real estate).
What is the fundamental issue?
The Qualified Opportunity Zones (“QOZ”) program, which was established as part of the 2017 Tax Cuts and Jobs Act, is intended to spur economic development in neglected regions by providing tax breaks to investors. Through the provision of tax incentives to investors, the program creates possibilities for real estate investment and development in underserved neighborhoods. Qualified Opportunity Zones (QOZs) were named in 2018 after nominations from states and territories, including Washington, DC, were received.
This temporary initiative is planned to expire on December 31, 2047, at which point it will be discontinued.
- First and foremost, capital gains reinvested (within 180 days of a sale to a nonrelated person) into a QOZ are tax-deferred for the duration of their participation in the program, which is currently through 2026
- Second, capital gains reinvested (within 180 days of a sale to a nonrelated person) into a QOZ are tax-deferred for the duration of their participation in the program, which is currently through 2026
- And third, capital gains reinve Investing in a new investment for five years results in a 10 percent decrease in the amount of tax paid on the reinvested gains
- Investing in it for seven years results in a 15 percent reduction in the amount of tax paid. Furthermore, if the profits gained on the new investment in a QOZ are kept for a period of at least 10 years, they are exempt from future capital gains tax.
It is possible to invest in O Funds using capital gains rolled over from a prior sale (within 180 days) as well as non-capital gains funds; however, only capital gains reinvested are eligible for the tax benefits. If you participate in both capital gains and non-capital gains funds, they will be classified as distinct assets and will get different tax treatment.
If you want to take advantage of the tax benefits, you must make your investment in a QOZ through a “Opportunity Fund,” which can be either a partnership or a corporation formed specifically for the purpose of investing in QOZ property. The following are the conditions for an O Fund:
- QOZ property (which can include stock, partnership interests, and/or tangible personal property used in a trade or company inside a QOZ, such as real estate) must constitute at least 90% of total assets. Must certify with the Department of the Treasury and the Internal Revenue Service (IRS) using Form 8996, which must be filed with federal tax returns.
In addition, any “QOZ business property” that a QOZ O Fund invests in must be “substantially all” located inside a QOZ, which according to the proposed guidelines is satisfied if at least 70% of the property is located within a QOZ. After an O Fund purchases QOZ commercial property, the legislation mandates that it be put to “original use” (new) or “significantly improved,” which implies that the O Fund must spend at least as much money on the improvement as it did on the acquisition price of the used asset.
Additionally, if a piece of property has been unoccupied or abandoned for at least five years, it might be regarded to be in its original usage.
I am a real estate professional. What does this mean for my business?
Multiple opportunities for real estate agents exist as a result of the QOZ program. Investors can redeploy investments in capital assets without having to pay tax on any profits immediately, which may incentivize them to sell real estate assets that they might normally hold onto in order to avoid paying tax on such gains in the first place. On the back end, the Opportunity Funds established to invest in the zones will be on the lookout for commercial property in which to make investments, which in many cases will include real estate and/or development prospects for real estate, as well as other types of property.
The National Association of Realtors (NAR) supports tax policies that provide for the deferral and/or exclusion of capital gains taxes on investments that are sold if the proceeds are re-invested into low-income or economically disadvantaged communities or neighborhoods that have been officially designated as eligible to receive such tax-incentive funds.
When the Treasury Department announced the first set of proposed QOZ rules in October 2018, it addressed various administrative components of the program, including how QOZs would be designated. In February 2019, the Internal Revenue Service held a public hearing to gather comment from stakeholders and industry groups on the first set of proposed regulations. On April 17, 2019, a second wave of proposed regulations was posted, which provides additional in-depth specifics on the program as well as clarification on how it is to be implemented and administered.
In addition, the Department of Housing and Urban Development, as well as the Treasury Department and the Internal Revenue Service, issued “requests for information” in April, soliciting feedback from stakeholders on the program’s data reporting requirements from those who are involved in the program.
Specifically, the Council will look at methods to reinvigorate low-income neighborhoods by simplifying and better coordinating current Federal programs to economically challenged areas, such as Opportunity Zones, among other initiatives.
Finally, the program’s final regulations were revealed towards the end of 2019, and they offered much-needed security for many investors who had been anticipating them.
IRS Frequently Asked QuestionsNAR Opportunity Zone Toolkit
The Commercial Federal Policy Committee is a body that advises the federal government on commercial issues. The Federal Taxation Committee is a body that oversees federal taxation. NAR Library (National Association of Realtors) Archives has already completed the necessary research on your behalf. References (formerly known as Field Guides) give connections to articles, eBooks, websites, data, and other resources in order to provide a thorough overview of various points of view. Articles from EBSCO (E) are exclusively available to NAR members and require a password to access.
The Qualified Opportunity Zones Toolkit (National Association of REALTORS®, October 2019) is a collection of resources for those working in qualified opportunity zones. The purpose of this resource is to assist associations in their collaboration with state and local economic development organizations, Opportunity Funds, and their membership in order to plan and implement development in qualified Opportunity Zones. Qualification for Opportunity Zones (National Association of REALTORS®) Issue Summary (National Association of REALTORS®) With the National Association of Realtors’ Federal Issues Tracker, you can learn more about the policy aspects of Qualified Opportunity Zones.
Includes links to any current legislation as well as the congressional contacts for the National Association of Realtors’ Advocacy Team.
Opportunity Zones Frequently Asked Questions(Internal Revenue Service, Nov. 2, 2021) (Internal Revenue Service, Nov. 2, 2021) These FAQs (and answers) help to explain opportunity zones and give links to the IRS notices and resources for opportunity zones. Map of Opportunity Zones(Department of Housing and Urban Development, 2021) (Department of Housing and Urban Development, 2021) An interactive map from the US Department of Housing and Urban Development (HUD) that allows you to search for QOZs.
Final Regulations Issued Implementing Opportunity Zones Tax Incentive(Journal of Taxation of Investments, 2020) (Journal of Taxation of Investments, 2020) E “This article summarizes a number of important clarifications and changes made to prior guidance by the final Treasury Regulations issued under IRC Section 1400Z-2 implementing the federal Opportunity Zone program.
Webinar: Capitalizing on Opportunity Zones and Section 199A(National Association of REALTORS®- login required) NAR representatives discuss how these two new developments will affect the commercial real estate industry.
2018) EOffers a great flow-chart about how to set up Qualified Opportunity Funds and how those invest in Qualified Opportunity Zones.
Changes to the 2020 Decennial Census will have no effect on the boundaries of qualified opportunity zones (Internal Revenue Service, Oct. 2021) The IRS clarifies in this release that the Opportunity Zones established in 2018 and 2019 are not susceptible to changes in Census tracts as a consequence of the 2020 Census results, as previously reported. In tandem with the rest of the United States housing market, home values in Opportunity Zone redevelopment areas continue to rise (ATTOM, Nov. 18, 2021) Home prices in qualified opportunity low-income Opportunity Zones are discussed in detail in the ATTOM report “analyzing qualified opportunity low-income Opportunity Zones.” ATTOM Chief Product Officer Todd Teta stated, “Valuations in marketplaces distributed among so-called Opportunity Zones continued to rise at about the same rate as values in more affluent locations, as the housing-market bubble continued to improve fortunes just about everywhere.” In comparison to other places, home prices in Opportunity Zones are still extremely cheap.
” However, the continued growth demonstrated that a large number of families are purchasing in those locations — a fact that should attract the attention of investors wishing to take advantage of Opportunity Zone tax benefits.” “Opportunity Zones: A Place-Based Incentive for Investment in Low-Income Communities” (Opportunity Zones: A Place-Based Incentive for Investment in Low-Income Communities) (Cityscape: Journal of Policy Development and Research, 2020) E “The Tax Cuts and Jobs Act of 20171 made a number of significant adjustments to the United States tax law.
The press has extensively covered changes in marginal tax rates, deduction rules, and corporation rates, but one component of the tax code has only gotten a small amount of coverage in recent months.
If you are interested in participating yourself or if you want to help your clients learn more about these investment opportunities, which are drawn from every eligible census tract in the United States, the National Association of REALTORS® is assisting local REALTOR® associations to assist members in taking advantage of the new program.
- The Housing Opportunity Committee heard from Chris Coes, vice president of land use and development for Smart Growth America, on May 15 during the REALTORS® Legislative Meetings.
- Trade Show and Exposition Coes talked about opportunity zones and the dangers of community relocation in his presentation.
- The Internal Revenue Service has issued guidance on the deferral of gains for investments in Qualified Opportunity Funds (Internal Revenue Service, Apr.
- The gain is postponed until the investment is sold or exchanged, or until December 31, 2026, whichever is the earlier of the two dates is reached.
- In a recent article published by National Real Estate Investor on March 26, 2019, This article explores how tax incentives might deceive investors into overlooking a project’s lack of profitability and social effect due to the tax benefits.
- Opportunity Zones: A necessary tool or a tax windfall for the wealthy?
- Do you have a suggestion for a real estate-related topic?
- A link on this website does not constitute sponsorship by the National Association of REALTORS®, nor does it imply endorsement by any other organization.
This information and these links are given just for your convenience, and you use them at your own risk.
What You Need to Know About Opportunity Zones
Many people applaud the Tax Cuts and Jobs Act (TCJA), which is recognized for its creation of Opportunity Zones and for its ability to channel billions of dollars into low-income regions. However, it remains to be seen if this initiative will eventually serve to provide value to or remove value from the areas it is intended to benefit. In the United States, Opportunity Zones (OZs) are described as “economically challenged places where new investments may be eligible for favorable tax treatment under specific circumstances.” OZ plans, which were first proposed in April of this year, are now in place for towns in all 50 states this year.
Investors can file Form 8896 with the Internal Revenue Service to establish a Qualified Opportunity Fund, which are companies created as either a partnership or corporation for the purpose of investing in an OZ census track, whether in real estate or directly in enterprises through stock ownership.
- Understanding the processes of OZs, on its own, poses a significant barrier to entry for more socially responsible investors.
- Markeze Bryant works for Accumen America, a seed stage investment fund dedicated to assisting low-income families in gaining greater access to health care, education, and financial services.
- He was born in a now-named OZ, went to college in an OZ, and was most recently married in an OZ, all of which are now labeled.
- — He gave his thoughts on how communities around the United States might get the most benefits from the initiative.
- Is it possible for you to break out how OZs will function mechanically at this point?
- Downtown, industrial, suburban, and rural regions are all covered by them.
- In order to make a profit, a taxpayer must first sell an asset and then realize a capital gain on that item.
Finally, there is a delay and a decrease in the amount of taxes payable to the government.
If you hold your investment in some of these opportunity zones from funds, you would practically pay no tax on your gains, which might result in a 30-40 percent rise in your annualized return, in my opinion.
Capital has traveled in a predictable manner in our country over the last hundred years or so, serving specific regions and populations.
As a result, certain people and geographical locations continue to be left behind.
Are OZs going to be mostly extractive or additive in all cases?
I believe they are both correct.
The folks who require “opportunity” will not be the ones who control the capital in question.
Since the 1600s, this has been the method through which individuals have amassed money.
The value of investments in human capital can last even after the investment has been exited — for example, investing in an entrepreneur who still has the relevant experience and context, as well as the contacts and the ability to move on to something bigger and better after the investment has been exited.
- If you think about it, the mortgage interest tax deduction is one of the reasons we have such a thriving single-family home real estate market.
- All of this is possible because of government incentives.
- It seems like the term “impact washing” is being thrown about more and more frequently in the industry.
- Impact washing is unquestionably a thing these days.
- And I believe that the reason for this is because these investments have very low multiplier effects.
- The necessity for condominiums that are three, four, or five times the price of the ordinary person’s ability to pay in the area does not seem to me to be necessary.
- To be honest, those investors are just taking advantage of a tax break; the majority of them do not claim to be making a positive social effect.
The agreements that have the greatest potential for effect should account for 80 to 90 percent or more of all completed transactions, and they should be highlighted.
What would the design of a non-extractive OZ look like, and what are the best practices for these types of construction projects?
In terms of employee and contractor ownership, I’d want to see a solid mix of broad-based ownership, training, and apprenticeships, as well as widespread recognition of current community initiatives.
We have a question to ask…
What percentage of it is still in the community?
Employment that pay a decent wage are really essential, but I believe that we must go beyond simply creating professions and instead focus on jobs that allow people to accumulate enough money to be able to invest in the future.
I believe this is a really intriguing topic, and it should be a primary priority for the board, the fund management, and the limited partner.
In spite of this, under the legislation, luxury hotels and inexpensive housing units are just as likely to be constructed in these regions as they are in other places.
The issue is, to what extent is this investment inclusive?
Keep in mind why this application was developed in the first instance.
To find out who is on the winning side, who is employed, and who has the power, ask the following questions: When considering whether or not to participate in a fund that claims to exclusively be interested in commercial real estate development or start-up financing, the second level of consideration should be “what sort of startups?” The question is: “What happens if the startups are successful – who stands to gain?” Perhaps my greatest concern is that “OZ Part 2” will be released in 30 or 50 years since the first one failed to make an effect — with hundreds of talented people scrambling about attempting to come up with a new community development tool that will never be successful.
- Consequently, I believe it is critical that we get it right this time and ensure that this wave of money attaches itself to individuals who are poor or who live in low-income regions – whether or not they are in a designated opportunity zone.
- Are you feeling optimistic about the next iteration of the OZ development process?
- First, it appears to be a hybrid curriculum.
- Now, according to general finance, in order to make anything function in this economy, you must borrow money and raise equity.
- Lending to small and medium-sized businesses.
- Student loans are a type of debt.
- With no buffer, no wealthy uncle who will say, “Here’s a year to work this out, and you don’t have to pay interest,” there is no one to turn to.
The second point to mention is that, as compared to other programs, this one has a far wider reach.
It has a broad influence on everyone, which I believe is a good thing since, even in impact investing, we have a small number of individuals and a limited amount of cash working on the most serious problem facing the country.
What actions can communities and investors do to ensure that cities are held responsible and that they receive the most benefit from the program?
In my opinion, there is no way to accomplish impact responsibility unless it is mandated by the federal government.
To avoid this program becoming a niche market where only lawyers and tax attorneys make money, I believe it’s critical to keep the program’s approach market-oriented.
Providing assistance to an entrepreneur in developing his business plan or identifying a suitable parcel of land on which to build a real estate project is an excellent way to get cash ready to compete in the market.
What is the first step to take?
Participate in Opportunity Zones in your area and learn about the strategies that are being used to attract investment.
I believe that education and providing some form of value to those who are able to benefit from it are the most essential things to do in life.
Make use of your abilities to assist entrepreneurs in raising funds.
Essentially, entrepreneurs need to focus on what they do best, which is to build successful businesses.
There will be a national, institutional layer, where you will find the megafunds that will be working on huge venture capital or real estate projects, as well as other players.
However, there is a small mom-and-pop bakery that has to fund $10,000 in order to continue operating. Both are really significant. So just become engaged in areas where you have the necessary expertise and are able to take action.
What is the Opportunity Zones Program? — Multifamily.loans
Not only did the Tax Cuts and Jobs Act of 2017 bring about a slew of changes to the way companies are taxed, but it also established a new tax incentive program to stimulate capital investment in economically challenged areas around the United States. Corporations can attract investment into multifamily and commercial real estate, as well as stock or partnership interests in firms that operate in or do a large amount of business in Opportunity Zones, through the use of opportunity funds. Investors must, however, make their investments through an Opportunity Fund in order to be eligible for the tax benefits afforded by the Opportunity Zones program.
In the case of building upgrades, an Opportunity Fund must invest more in the rehabilitation of a structure than it did in the acquisition of the facility in the first place.
Opportunity Funds Hope To Tap A $6.1 Trillion Market
According to a 2017 survey, people and companies in the United States are sitting on unrealized capital gains in stocks and mutual funds worth $6.1 trillion. Individual investors and companies, in general, would not want to sell any of these assets in order to re-invest the proceeds since they would be subject to capital gains taxes on the proceeds. Instead, by reinvesting these revenues into low-income communities, they may contribute to the revitalization of low-income neighborhoods around the United States.
How Opportunity Funds Work
Previously, we said that in order to be eligible for the tax benefits afforded by the Opportunity Zones program, investors must make their investments through an Opportunity Fund, as previously stated. An Opportunity Fund is a partnership or company that intends to invest a minimum of 90 percent of its assets in Opportunity Zones in the United States. For the period of December 31, 2026, investors can defer paying taxes on recent capital gains by investing in opportunity funds. Investing in an Opportunity Fund for at least five years before to December 31, 2026 will result in a 10 percent reduction in deferred capital gains tax obligation, while investing in an Opportunity Fund for seven years previous to that date would result in a 15 percent reduction in tax liability.
Furthermore, it’s vital to remember that Opportunity Funds can self-certify, which means they don’t have to be certified by the government in order to operate.
The Opportunity Zone Creation Process
Following the passage of the Tax Cuts and Jobs Act in 2017, governors of U.S. states and territories (as well as the mayor of Washington, DC) were given until April 2018 to submit nominations for census tracts to be designated as Opportunity Zones. In order to be qualified to become an Opportunity Zone, a region must achieve certain income standards set out by the Internal Revenue Service, which include:
- At least a 20 percent poverty rate must be achieved
- A median family income of:
- In non-metropolitan regions, the median family income is less than or equal to 80% of the statewide median family income. Cities and metropolitan areas: Have median family incomes that are less than or equal to 80 percent of either the statewide median family income or the entire metropolitan median family income (whichever is larger)
Nominations are limited to a maximum of 25 percent of census tracts in each of the specified geographic areas. In addition, if the census tracts in a qualifying region border an existing Opportunity Zone and the median family income in the area is not more than 125 percent of the median family income in the adjacent Opportunity Zone, the census tracts in the qualifying area may be eligible as well. As a consequence of this nomination procedure, roughly 12 percent of the census tracts in the United States are currently designated as Opportunity Zones, a total of around 8,700 census tracts throughout the United States.
Some of the most significant are as follows:
- Affordably priced housing, commercial real estate, hospitality development, mixed-use development, multifamily and single-family residential, and student housing are among the areas in which Caliber’s Tax Advantaged Opportunity Zone Fund, LP plans to invest $500 million of capital in Arizona, Colorado, Nevada, Texas, and Utah, according to the company. Allegash Opportunity Zone CRE Fund I: With intentions to deploy $500 million in capital throughout Virginia, North Carolina, and Maryland, the Allagash Opportunity Zone CRE Fund I concentrates its investments in commercial real estate, worker housing, affordable housing, and multifamily residential real estate. Cresset-Diversified QOZ Fund: With a goal of generating $500 million in capital commitments, Cresset’s fund intends to invest in asset groupings such as low-income housing, self-storage, parking, and even transferring existing businesses into Qualified Opportunity Zones, among others. In addition, EJF OpZone Fund I LP, which is managed by EJF Capital, intends to raise $500 million in capital from investors across the country to make investments in areas such as affordable housing, mixed-use development, commercial real estate (including office and retail), workforce housing, student housing, and multifamily residential development. In a similar vein to the EJF OpZone Fund I LP, EquityMultiple’s Opportunity Zone Fund is attempting to raise $500 million in capital to invest in commercial real estate, multifamily residential properties, affordable housing, workforce housing development, mixed-use development, and student housing throughout the country.
Opportunity Zones and the Low-Income Housing Tax Credit (LIHTC) Program
Earlier, we discussed the distinctions between the Opportunity Zones and LIHTCtax incentive programs. While these programs are distinct, they may be able to be combined to provide an even bigger tax advantage to investors. In practice, however, LIHTC investors and Opportunity Fund investors are frequently very different in nature; for example, LIHTC investors are frequently banks, which are unable to own equity investments and, as a result, do not generate any capital gains that can be offset by the Opportunity Zones tax incentive.
The vast majority of the time, though, this will have to come from new construction, as it’s doubtful that a LIHTC property renovation would be more expensive than the cost of purchasing the property in the first instance (as is required for the Opportunity Zones program).
HUD 221(d)(4) loans are designed for the construction and substantial rehabilitation of multifamily properties.
In addition, the HUD 221(d)(4) loan has a fixed rate for the first 40 years of the loan term (with an additional 3-year construction period).
Financing Multifamily Properties in Opportunity Zones
While we’ve already discussed HUD multifamily financing, it’s important to note that it’s not the only option for financing multifamily homes in Opportunity Zones. Other frequent multifamily financing alternatives include Freddie Mac ® and Fannie Ma ® mortgages, amongst others. While Fannie ® and Freddie ® provide multifamily financing, they do not provide ground-up construction loans; instead, they only provide property rehabilitation loans and refinancing. Many investors and developers may choose to secure a short-term bank construction loan and subsequently refinance into longer-term fixed-rate financing, such as a 5-7 year CMBS loan or a Fannie Mae or Freddie Mac multifamily mortgage, for ground-up building projects.