The Federal Opportunity Zone Program mandated by Congress was created to encourage the improvement of lower-income regions. Investors can enjoy significant relief from capital gains taxes by buying and improving properties located in Opportunity Zones, but must meet fast-approaching deadlines:
- A 15% discount on capital gains invested in the property if held for 7 years or more: Expires 12/31/2019
- A 10% discount on capital gains invested in the property if held for 5 years or more: Expires 12/31/2021
- A temporary deferral of capital gains tax due in the current year on capital gains reinvested in the property: Expires 12/31/2026
In addition, investors can realize a permanent exclusion from federal capital gains taxes on Opportunity Zone property after a holding period of ten years or longer.
However, if we enter a recession, the value of an Opportunity Zone property might decrease more than other properties. That’s because meeting the program’s “substantial improvement” requirement may no longer make financial sense. The benefit of deferring the payment of capital gains tax to 12/31/2026 will still exist, but the value of this incentive continues to decrease as the capital gains tax payment due date
of 12/31/2026 approaches.
This is the first time investors have been able to invest capital gains from non real estate activities into real
estate and potentially avoid all federal capital gains taxes on the new investment.
A Qualified Opportunity Zone Fund (QOF) is the investment vehicle, set up as a corporation or a partnership, that deploys private investment capital by starting a business or purchasing a property in an Opportunity Zone. To stay qualified for tax benefits, the QOF must “substantially improve” the property by remodeling or further developing the property in compliance with the Opportunity Zone Program guidelines.
Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
Garrett Sholer is a Principal and Senior Vice President with Lee & Associates, Opportunity Zone Group. With 25 years of experience in commercial real estate investments and development, his primary focus is facilitating the acquisition and disposition of federal Opportunity Zone properties and self-storage facilities/development sites. Within federal Opportunity Zones, Garrett’s primary focus is sites which are economically viable for ground-up development or redevelopment. This most frequently includes a multi-residential (apartment), or industrial component and often includes assisted/senior living and/or a low-income housing component. For further information or to discuss the potential strategies for your Opportunity Zone property, please contact Mr. Sholer directly.