Opportunity Zones are creating quite a buzz in the commercial real estate industry. There hasn’t been a new program like this with such a significant impact since the loan modification programs during the recession. Opportunity zones are a big deal, and investors are rushing to learn all they can to get involved. These are four things to know about CRE opportunity zones.
What Are They?
Opportunity zones are a recently released federal program that is still taking shape. When all of the details are hashed out, the new program should have a giant impact on impoverished areas and commercial real estate developers and investors. The tax reform bill of last year created an innovative, fresh investment program designed to encourage spending in distressed communities scattered across our great country. Qualified investors can receive significant tax incentives, and residents in these underprivileged communities will likely benefit from a flood of fresh funding.
Where Are These Opportunity Zones Located?
There are 8,700 designated Opportunity Zones in the US designated by the state as areas of needed investment and the likelihood to create a win-win benefit for both the community and investors. To qualify as an opportunity zone, a minimum of 20 percent of the local population within the area must fall below the U.S. poverty rate, and the regions median income can’t be over 80 percent. Want to check a particular area? Visit the U.S Department of the Treasury for regional information.
What Are the Benefits of the Program?
Aside from the obvious benefit to economically depressed communities (over 15 percent of Americans lives in one of these areas according to a report by the Economic Innovation Group), investors can defer taxes on their capital gains until the end of 2026 as long as the gains are reinvested in what is called a Qualified Opportunity Fund. A Qualified Opportunity Fund is an investment program developed specifically to make investments in Opportunity Zones.
Investors are incentivized to hold their investment in an Opportunity Fund for ten years. Keeping your investment for five years will allow you to avoid a 10 percent capital gains tax and retaining it for an additional two years saves you another five percent. However, holding it for a decade not only gives you a tax savings of 15 percent, but your future appreciation after that is also considered free from tax.
Some Details Are Still Unknown
Some of the specific details of the new program are yet to be developed and revealed, like how to report your gains. Both the Treasury Department and IRS plan to release additional information on the policy sometime later this year. You should always talk with your tax professional about your unique situation, but the key points are relatively simple, temporary deferral of tax on capital gain until 2026, up to 15 percent reduction on those gains when reported in 2026, and all of the appreciation is tax-free as long as the investment is kept for 10 years or longer.
It’s a great time to be a commercial real estate investor, and opportunity zones have seriously changed the playing field. Don’t wait to get started, because savvy investors recognize an incredible opportunity when they see one.