February 21, 2019

What’s the Deal with Opportunity Zones?

If you’ve not yet heard of Opportunity Zones and what they are, I suspect you will soon enough. In fact, you’re going to hear about them right now, here! For they are being talked about on the news everywhere and especially throughout the investment and real estate industries. Yet very few people understand the impact that Opportunity Zones have and will yet have upon these industries and the country as a whole. So, let’s delve into this and learn everything there is to know about Opportunity Zones.

Just What Is an Opportunity Zone?

In a nutshell, an Opportunity Zone is a city, urban area or metropolis that has been designated economically distressed, thus where new investments can be made under special conditions. And those make such investments can be eligible for special tax cuts or treatment (including deferments). Areas and locations to qualify as Opportunity Zones mu8st be nominated by the state in which they are located. And the nomination has been approved by the Secretary of the U.S. Treasury. This he/she does through delegating authority through the IRS (Internal Revenue Service).

How Long Have They’ve Been Around and When Were They Created?

Fairly recently were Opportunity Zones added to the tax code through the Tax Cuts and Jobs Act of December 22, 2017. So, Opportunity Zones have been available for a very short period. The set of them were actually designated on April 9 of 2018. As it is, Opportunity Zones are now designated to cover portions of all 50 states, all five U.S. territories as well as the District of Columbia.  

What Purpose Do Opportunity Zones Serve and What Is a QOF?

By providing tax deferments or tax cuts (tax incentives) to potential real estate investors, Opportunity Zones not only spur real estate investment and development but also induce economic development and job creation throughout the distressed communities which are so designated. How this is accomplished is not difficult to understand. By providing tax benefits to investors they thus are open to investing in and developing land parcels and real estate projects in distressed and impoverished areas they would otherwise not invest in. Specifically, and as a good example, an investor can defer taxes on prior gains from an investment in a Qualified Opportunity Fund (QOF).  If the QOF investment is kept longer than five years, then there is a 10% exclusion of the deferred gain. And if the QOF investment is held for more than seven years, the 10% becomes 15%. There is more if the investment is held in the Opportunity Fund for at least 10 years. In this case, the investor will become eligible for a greater increase tax exclusion and in accordance with the fair market value on the date that the QOF investment is sold or exchanged.  

Want More Info on Qualified Opportunity Funds?

So, to be clear, a Qualified Opportunity Fund is an investment method and opportunity that can be used to set up as either a corporation or partnership for investing in qualified property that is located in an Opportunity Zone.  However, neither you nor any investor needs to live in an Opportunity Zone to invest in one and develop property in one.  In fact, you don’t have to live or work or even have a business in an Opportunity Zone to be eligible to invest. The only thing you need to do is invest an established gain in a QOF (Qualified Opportunity Fund) and then defer the tax on the gain.

Where Can I Find Opportunity Zones? Is There a List of Them Available?

At Opportunity Zones Resources (here: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx) and in the Federal Register at IRB Notice 2018-48 (here: https://www.irs.gov/pub/irs-drop/n-18-48.pdf) a list of Qualified Opportunity Zones can be found. Plus, a visual map of census tracts that have been designated as Qualified Opportunity Zones is located at Opportunity Zones Resources. In addition, a list of designated Qualified Opportunity Zones where a Fund can invest and see it meets investment requirements, can be found at the IRB Notice 2018-48 site.

How Can You Obtain More Information about Opportunity Zones?

Since the inception of the Opportunity Zones program, the U.S. Treasury Department and Internal Revenue Service have been adding more information and further details about the program. This includes additional legal guidance and information on this relatively new tax benefit. For more information, you can visit Treasury.gov and IRS.gov.   To learn about Opportunity Zones in California, including the Bay Area, you can visit the Ca.gov  site online here: http://dof.ca.gov/Forecasting/Demographics/opportunity_zones/  

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