We are hearing more and more about Opportunity Zones in the real estate world these days. However, because they are so new, a lot of people, even seasoned commercial real estate investors, do not fully understand the benefits and rules of investing in real estate located within these Qualified Opportunity Zones (QOZ).
As the housing recovery began to take shape several years ago and continuing even today, most of the major development dollars flowed into the large cities, leaving countless low-income areas relatively unchanged over the last decade. In an effort to improve the economic conditions and create jobs in these areas, Congress asked all the state governors to submit a list of geographical locations within their states that were most in need of economic development. They were asked to provide justification of the need as well as the ability to absorb the influx of investment dollars into these communities. As a result, Opportunity Zones were created.
Opportunity Zones are economically-distressed properties that may qualify for preferential tax treatment if certain parameters are met. These QOZs were created by Congress through The Tax Cuts and Jobs Act of 2017. The purpose of the Act is to attract long-term capital to low income communities and thereby spur economic development and job opportunities in those areas by offering long-term tax incentives to investors and developers of real estate in these areas. Investors can defer capital gains from a previous sale through Opportunity Zone investments.
The Act provides for capital gains tax reductions of 10% if the investment is held for at least five years. For investments held seven years or longer, the reduction on the deferred gain is increased to 15%. If the investment is held ten years or longer, the investor is eligible to increase the basis of the investment to equal the fair market value as of the sale date or exchange of the OZ investment, which could result in even greater tax savings.
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https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
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The information in this document is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any real estate decision, you should consult an accounting, tax, legal or other competent professional. Real estate decisions, like most other business transactions, are fact dependent and could present advantages and disadvantages to the seller and buyer depending on the specific situation.
