Opportunity Zones News
Where Opportunity Zones Fit Into Your REI Strategy
November 5, 2019- Forbes
Opportunity zone investing is a popular topic around which details can be obscure and challenging to interpret. There’s also some confusion about how investing in opportunity zones works, who it’s for and the tax deferral and elimination advantages it affords.
Let's explore background information and resources to help you decide if it’s a fit for you and how you can get started with an existing fund or start your own.
Opportunity Zones For Tax Deferral
Opportunity zones are a valuable incentive created by the federal government to support the economy and provide capital gains tax shelter to investors. What’s often unclear in the media coverage is that opportunity zones are only for individual and corporate investors who have capital gains from any source.
The intention of the program is to provide an infusion of capital to communities needing residential and commercial revitalization. The Tax Cuts and Jobs Act of 2017 designated more than 8,000 communities across the U.S. as eligible for tax-reduction benefits to investors. This is available to entrepreneurs who make substantial improvements to real property or businesses.
Investing in opportunity zones is gaining awareness as a more convenient alternative to the 1031 exchange. The absence of like-kind property restrictions and replacement property purchase requirements gives far more flexibility in your investment options with opportunity zones.
Opportunity Zones Don’t Guarantee Results
An important thing to understand when pursuing opportunity zone investing is that just because an area is designated as an opportunity zone does not mean it is always a good market for real estate or business investment.
The critical point here is not to make a market feasibility decision based solely on inclusion as a designated opportunity zone. These are neighborhoods that have been identified as distressed. The designation is only based on incomes and does not consider regional economic factors that typically signify a suitable investment.
The issue is that these investments can represent significant risk unless identified, acquired and managed appropriately. While you may have the potential for tax deferral and elimination, there is also the risk of default, high vacancy rates, excessive turnover and challenges exiting the investment profitably.
You can mitigate your risk by conducting due diligence to find opportunity zones — and markets in general — that have the potential to perform well within the scope of your investment criteria and strategy.
Consider these factors when selecting an investment market:
• Stable population and employment growth.
• Expansion in manufacturing, tech, biosciences and hospitality.
• Stable or rising property values and lease rates.
• Tandem growth in commercial and residential assets.
• Favorable regulatory and zoning policies.
• Low state and local income and property tax rates.
Current top-performing markets for opportunity zones include New York, Connecticut, California, Indiana and the District of Columbia based on the creation of high-income households. In your market research, look for regions with higher than average income growth over the last five to 10 years.
How can I leverage opportunity zone investing to build my portfolio?
The tax benefits provided by opportunity zone investing allow you to retain and reinvest your capital for the fastest growth in assets. Rather than forfeiting your gain to the Treasury, you can build, protect and allocate more of your proceeds to your retirement, heirs and stakeholders.
How do I invest in opportunity zones?
You can invest either with a qualified opportunity zone fund (QOF) or by self-certifying as a QOF with an application to the IRS (form 8996).
If you’re experienced in asset management, you can opt to create your own qualified opportunity fund and manage the asset yourself. Alternatively, you can work with an existing QOF that has experience with the asset class on which you focus.
There are myriad facets to the opportunity zone program to navigate that go beyond the scope of this article. Here’s a brief rundown of the essential tax benefits and rules:
• 10% increase in tax basis after five years.
• 15% increase after seven years.
• Elimination of post-investment capital gains tax liability after ten years.
• Defer tax on gain from any source.
• “Vice” property types are excluded.
• Self-certify as a QOF by filing form 8996 with the IRS.
• Capital gains must be reinvested within 180 days from realization, or from the end of the calendar year if realized from a partnership and reported on schedule K-1.
• 90% of QOF assets must be invested in opportunity zones.
• Investment must result in substantial improvement to the property.
There are more specifics, and I recommend speaking with a financial or accounting professional who can advise if opportunity zone investing is the right fit for your wealth-generation strategy.
Integration With Your Strategic Arsenal
It’s clear why opportunity zones are receiving significant attention. In the current economic climate, we need to leverage and reinvest every bit of the value we create in our portfolio. Our long-term financial positions — personally and organizationally — depend on how much capital we retain, shelter and multiply.
While the capital gains tax benefits are enormous, we need to ensure that the subdivisions and properties in which we invest promise excellent margins and sustained appreciation. It’s crucial to conduct your due diligence when considering opportunity zone investments, as the designation doesn’t indicate viability.
Getting started in opportunity zone investing is a matter of researching viable markets and deciding whether to team up with a QOF or self-certify and operate independently. Whichever route you choose, work with credible and professional fund and asset managers to ensure manageable risk, transparency and the best returns.
POST WRITTEN BY: Ari Rastegar
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