Understanding Opportunity Zones

When the new tax bill was passed at the end of 2017, it contained numerous benefits for investors and businesses, and the tax treatment of real estate changed significantly. However, there is one aspect of the new tax bill that really hasn’t been getting much attention, especially in the Silicon Valley area – Opportunity Zones and Opportunity Funds.

Image by TMG177 via Pixabay

The primary purpose of the Opportunity Zones program is to bring much needed investment to communities that are economically distressed. Revitalizing such areas typically requires significant taxpayer expense, but the the Opportunity Zone tax incentives are designed to stimulate private investment in these areas as an alternative. Taxpayers who invest in Qualified Opportunity zones may be eligible for capital gains tax incentives.

What are Opportunity Zones?

Following criteria outlined in the Investing in Opportunity Act, which was nested within the Tax Cuts and Jobs Act of 2017, Opportunity Zones are census tracts comprised of economically distressed communities. As of this writing, there are qualified opportunity zones in all 50 states, including California, plus many areas designated as US possessions, such as Puerto Rico and the Virgin Islands.

Opportunity Zones Map by Economic Innovation Group

Opportunity Zones target lower income areas that are typically overlooked for new investment, in lieu of suburban areas. The end goal is to inject jobs, affordable housing, and other economic stimuli into these zones to help them improve the economic outlook.

What are Opportunity Funds?

To encourage individual investors to get involved in revitalization efforts in opportunity zones, the Tax Cuts and Jobs Act of 2017 authorized the creation of a new investment vehicle, called “Opportunity Funds”, to channel investment to these qualified zones.

The tax benefits of investing in Opportunity Funds are substantial, but in order to realize the maximum benefit, you must hold the investment for at least 10 years. It allows you to defer taxes on realized capital gains until December 31, 2026, by rolling the gain into an Opportunity Fund.

Here’s how it works:

  1. Sell stock or another investment that has a capital gain and roll those funds into a Opportunity Fund within 180 days.
  2. If the investment is held for 7 years, you reduce your capital gains taxes on the original investment by 15%.
  3. If the investment is held for at least 10 years, you owe no taxes on any gains realized from the Opportunity Fund itself.

As always, each tax situation is different, so consult a tax adviser or tax attorney for information on how your specific situation could be impacted by investment in Opportunity Funds.

What do Opportunity Zones Look Like?

Image by Daniel Case via Wikimedia Commons (CC-BY-3.0)

Opportunity Zones in each state were nominated by the sitting governors in 2018. Census tracts meeting strict income guidelines could be nominated. Remember, Opportunity Zones are designed to revitalize economically depressed areas, so the census tracts typically fall in low-income areas. Some of the criteria include:

  • A poverty rate of at least 20%; or
  • A median family income of:
    • No more than 80% of the statewide median family income for census tracts within non-metropolitan areas.
    • No more than 80% of the greater statewide median family income or the overall metropolitan median family income for census tracts within metropolitan areas.

Source: US Internal Revenue Code Section 45D(e) – New Markets Tax Credit

After the governors submitted their recommended census tracts, the US Treasury assessed each and certified those meeting the guidelines.

Opportunity Zones and Opportunity Funds are still relatively new and their full impact, both for the investors and the communities served, is yet to be realized. However, Opportunities Zones represent a key opportunity for investors to diversify into real estate with tangible tax benefits.

Keystone Commercial Brokerage serves the needs of commercial real estate investors in the Santa Clara and San Mateo counties, specializing in commercial property, multi-unit residential, office space, and multi-use property. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas. Contact Paul at 650-924-2544, or email at paul@keystonebrokerage.com.

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