Tax Benefits investing in Opportunity Zones

Tax Benefits of investing in Opportunity Zones

Part of the updated tax laws, Opportunity Zones are becoming popular and attractive opportunity for commercial real estate investing. In short Opportunity Zones are areas under economic distress, with low income families (at least 20% of the population in the affected area). These areas are not set in stone like typical towns. For example, Clay County has two different zones, both in the northwest section of the county. The areas have been chosen by census tracts.

People investing in these zones receive a number of tax benefits. Investors must invest in the designated areas to receive the benefits.

See: EIG’s searchable Opportunity Zone Map

Investors have access to capital gains tax incentives only provided by this program. In order to take advantage of the tax breaks the investor must go through Opportunity Funds. Opportunity Funds are a US government and private sector partnership that agrees to invest at least 90% of it’s holdings into one of the Opportunity Zones. The Opportunity Funds are regulated to ensure that investment is taking place where it is needed.

Last month CIM Group announced $5 billion set for Opportunity Zones, and plans to invest in major markets like Los Angeles (solar energy), Dallas and others.

What are the major tax benefits for investing in Opportunity Zones?

The capital gain tax incentives are what have been driving so many commercial real estate investors to Opportunity Zones. Investors putting realized capital gains into an Opportunity Fund can defer paying the capital gains tax until April 2027 for those earnings. This includes all investments held through December 31, 2026.

If you get in early there are additional benefits. Anyone holding their Opportunity Funds investments for five years or more prior to the 12/31/26 cutoff can reduce their responsibility on the deferred capital gain principal by 10%. If the investment is held for at least seven years prior to the cutoff date the tax can be reduced by 15%. And if an investor holds their Opportunity Fund investment for at least 10 years they won’t have to pay any capital gains taxes on the appreciation in the Opportunity Fund investment.

As the capital starts to flow it will be interesting to see the impact of this on the communities intended to benefit. There have been a number of questions about how the success of the program will do in the short term (including from Sen. Tim Scott who co-sponsored the bill), however the final quarters of 2019 will determine if deadlines are pushed back and the program is altered.

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Get the FAQs on Opportunity Zones direct from the IRS.