Opportunity Zones: What They Are and What to Consider Before Investing
What is an Opportunity Zone?
According to the U.S Department of the Treasury, Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017 to “spur investment in distressed communities throughout the country.” This federal program was intended to provide tax incentives for commercial and business investments in low-income communities.
In May of 2018, the Department of Treasury certified 25 Opportunity Zones chosen by the D.C. Office of the Deputy Mayor for Planning and Economic Development. These zones were chosen based on census data regarding poverty rates and family income, as well as other development priorities of the District, including unemployment and employment disparities.
How do the Zones Benefit Real Estate Investors?
One of D.C.’s top investment priorities is for the increased development of affordable housing, as well as additional housing for the growing workforce in the District. While the focus of support is for projects proposed by larger development companies, there are still benefits for smaller and independent investors.
In general, Opportunity Zones become areas of revitalization, which in turn increases rates of employment, and draws the development of new amenities that serve the current communities and attract new residents. The local government increases its investments in infrastructure and crime fighting and as this revitalization occurs, property values rise. The opportunity to invest prior to significant appreciation of single family or small multi-unit rental properties is not always an exact science but knowing where these zones are located greatly increases chances that your investment will see an upside potential.
If you choose to invest in a property in an Opportunity Zone, federal taxes on any capital gains that are invested will be deferred until the sale of the property or December 31, 2026, whichever comes first. In addition, depending on how long the new investment is held, up to 15% of the investment will be sheltered from any capital gains taxes. (For a great infographic on how you can benefit from OZ investment, check out this Washington Business Journal article.)
In March of 2019, D.C. officials also announced new initiatives that will support the federal Opportunity Zone program. One of those initiatives is the OZ Community Corp. This group of lawyers, accountants and other experts will be available at no charge to assist businesses interested in benefiting from the opportunity zone program.
What Could this Mean for Smaller Investors?
If you find yourself with some significant capital gains and are looking for ways to decrease your tax burden, investing in an Opportunity Zone could be your ticket. Keep in mind these considerations, though.
- Your gain must be deposited into a qualified Opportunity Zone fund. This fund can be created by you or a traditional investment firm or manager.
- You must upgrade the property by also investing an amount equal to the value of the property’s structures. If you invest in a rental property, you should keep this in mind, as you may need to renovate and redevelop the property significantly to meet this qualification. For example, if you purchase a run-down duplex with a yard for $200,000, and the building itself is assessed at $100,000, you’ll need to also invest $100,000 into upgrades to the property.
- You’ll save big on property taxes. Even though you’ll be making some significant investments, as mentioned above you’ll be seeing some significant tax breaks. You’ll get the deferment of federal taxes on the initial investment amount, plus 10-15% of that investment will be sheltered from taxes if you hold the property long enough. In addition, if you sell the property for a gain in the future, that gain will be sheltered from capital gains taxes.
If you’re considering investing in an Opportunity Zone, check out these links for additional information and resources to help you navigate this prime investment opportunity.