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Understanding Opportunity Zones and How Investors and Developers Benefit

  • November 1, 2018
  • News
Understanding Opportunity Zones and How Investors and Developers Benefit

 

Understanding Opportunity Zones and How Investors and Developers Benefit

As a part of the 2017 Federal Tax Cuts and Job Act, opportunity zones were established as an economic development tool to stimulate long-term investments into low-income rural and urban communities throughout the nation.

 

What are opportunity zones?

The Internal Revenue Service (IRS) defines an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.”

 

Who determines opportunity zones?

With Congress establishing a national framework to identify where the opportunity zone policies will apply, governors are ultimately responsible for designating 25% of the states low-income communities as opportunity zones. Areas only qualify as opportunity zones if they have been nominated by the state and certified by the Secretary of the US Treasury through the IRS. Currently, there are designated opportunity zones throughout all 50 states, the District of Columbia, and five US territories. For the next ten years, investors will be eligible for certain tax benefits in return for investing in these designated low-income communities.

 

Why were opportunity zones created?

The establishment of these opportunity zones is intended to drive economic development and job creation to impoverished areas by providing investors with tax benefits and special capital gains treatment for investing in the zones. Investors are able to raise capital through the Qualified Opportunity Fund (QOF), an investment vehicle that raises capital in designated opportunity zones. Capital gains from the initial sale of an investment must be invested into a QOF within 180 days of the sale or exchange. Raising capital through QOF could help offset costs as interest rates rise.

 

How do investors and real estate developers benefit from opportunity zones?

These new incentives attract investments to communities that investors wouldn’t necessarily consider investing in otherwise, in turn benefitting both the investor and the community. Here are a few ways how opportunity zones benefit investors and encourage economic growth in impoverished communities:

  • Investors are able to defer taxes on any prior gains invested in a QOF until the investment is sold or exchanged.
  • If the QOF investment is maintained longer than five years, there is a 10% exclusion of the deferred gain. If the QOF investment is held for seven years then there is a 15% exclusion of the deferred gain. Therefore, investors can receive up to a 15% tax break on the capital gains from the original investment.
  • Any new appreciation of gains on investments held over ten years could qualify as tax-free.
  • If the investment is held in the QOF for at least ten years, then investors are eligible for an increase in the QOF investment equal to its fair market value when the investment is sold or exchanged.

Opportunity zones activate passive capital by linking investors to projects in low-income communities. The program also increases the scale of investments and lessens the risk to individual investors.

 

What types of investment qualifies to benefit in an opportunity zone?

Investors could benefit from an array of investments such as commercial real estate, manufacturing, infrastructure, or business investments. Virtually any type or amount of investment can qualify for the program. Because tax breaks generate an increase in potential profits, banks and lenders become more willing to approve of projects that may have previously been considered as financially unfeasible. The opportunity zone program also stimulates new construction because it incentivizes long-term investment. Investors that maintain their investment for longer periods of time enjoy the most amount of benefits.

 

How do opportunity zones affect Los Angeles?

The greater Los Angeles area maintains 274 designated opportunity zones that qualify for the program. Areas include but are not limited to Sylmar, Sun Valley, Northridge, Canoga Park, North Hollywood, Hollywood, Culver City, Downtown LA, and Long Beach. This program is set to benefit the most distressed communities that have not had equal levels of private investments as other neighboring communities. This evident delay of economic growth that the community struggles with is due to a variety of factors, and opportunity zones are considered to be the solution to the dilemma that has continued to persist on for years on end. If investors and real estate developers engage the community early, opportunity zones can present a greater social purpose.

 

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