Opportunity Zones (OZ) are part of the 2017 Tax Cuts and Jobs Act. Congress introduced Opportunity Zones as an innovative approach to spark long-term private investments in low-income communities. They used tax relief as an incentive for individuals to invest capital gains income. Relief comes in the form of deferral, reduction, or elimination. State governors designate Opportunity Zones, and all 50 states have them. Designations remain for 10 years.
What Are the Benefits?
Opportunity Zones provide tax relief in one of three ways:
Deferral. You can defer capital gains tax until 2026 if you invest at least 90 percent of the gains.
Reduction. A modest reduction in capital gains tax is available to those who hold Opportunity Fund investments for 5 to 7 years.
Elimination. If an OZ investor stays in business or real estate for 10 years and sells before 2047, 100 percent of the sales price is federal capital gains tax free. So far, 38 states have implemented the same type of legislation.
Only equity investments are eligible for the OZ tax incentives. Real Estate investments require an ownership interest of new construction within 31 months or existing assets that will be “substantially improved” within 30 months of acquisition.
What Are the Basic Opportunity Zone Rules?
As mentioned above, OZ offer significant opportunities for tax relief with investments. However, OZ don’t make bad investments good ones. They just make good investments better. So, due diligence is still important. Part of that due diligence is playing by the rules of the game:
180 day period
Within 180 days of the sale that results in capital gains, the gains must be invested in an Opportunity Fund
Capital Gains in Opportunity Fund
An Opportunity Fund is an investment vehicle structured as a partnership or corporation for the purpose of investing in OZ property. The law requires these funds to invest 90 percent or more of their capital as equity in OZ property in order to maximize the tax incentive. This includes stock, partnership interests and business property in OZ.
A qualified Opportunity Fund (QFund) can be created by the investors. Once the money hits the QFund, investors must deploy the assets. They can invest in business, existing real estate and new real estate.
If investors purchase existing real estate, they have 30 months to make improvements. This requires additional investment of the amount paid for the existing real estate. For example, if an investor purchased an existing building for $100,000 then he would be required to make $100,000 in improvements within 30 months.
The requirement changes for new real estate. In that case, when investors build a new building, it must be complete within 31 months.
Examples of Possible Deals in OZ
Purchase and improve property
Form a new clean energy business
Buy out original investor, create OZ fund to purchase and improve property
Assist partner in funding large real estate project
Assist in capital raise for new building and lease
Creating OZ business and more than a hundred units of market rate housing
Classes of real estate that get investors’ attention typically include grocery anchored retail, warehouse, industrial, skilled nursing, medical offices and multi-family dwellings. During COVID-19, investors may be coming up on the time limit to use the QFund in an Opportunity Zone. Contact Durfee Law Group at 480.324.8000. We would love to assist you.