Community Improvement Through Opportunity Zones
Past the financial benefits provided to investors, Opportunity Zones also offer much-needed capital to neglected or disadvantaged areas. While still a new initiative that wont demonstrate its true effects for many more years, there is no denying the potential for a wide range of positive impacts.
If you are considering investing in a Qualified Opportunity Zone, an experienced local real estate agent is an invaluable asset.
The Potential Of Impact Investing
Signed into law through The Tax Cuts and Jobs Act , sections 1400Z-1 and 1400Z-2 in the IRS Code created a new and dynamic community development program, opportunity zones. With trillions of dollars of unrealized capital gains across the U.S., the program provides a tax incentive for investors to re-invest such gains into Qualified Opportunity Funds dedicated to investing in government designated opportunity zones. Stimulating both individual and corporate investment in low-income communities within these zones across the U.S. and in U.S. territories, the expected capital formation and fund management platform created will be significant.
Closely aligned with this community development strategy, CohnReznick currently serves the types of organizations that are accumulating capital and managing the Opportunity Funds being formed. With a long and successful track record of servicing Private Equity, Venture Capital, Hedge Fund and Family Office organizations, we support the bridge between financial services and community development that will help deliver successful opportunity zone investments.
Learn how opportunity zones provide tax benefits >
Fulfilling The 90% Assets Requirement:
Under the Treasurys proposed rules, this will rely on the asset values reported on the O Funds applicable financial statements for that year.
There is a working capital safe harbor for O Fund investments in QOZ businesses that acquire, construct, or rehabilitate tangible business property, including real property and other tangible property used in a business operating in a QOZ. Cash and cash equivalents qualify as business property for at least 30 months after new capital is raised.
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Get The Owner Details And Contact Information For That Property With Reonomy
Once youve identified a property or properties of interest and analyze them as opportunities, Reonomy allows you to uncover owner names, mailing addresses and contact informationeven if the owner is an LLC.
Once you find an interesting property, click into its property card and check out the Ownership tab. There, youll be able to see the reported owner of the property, whether its an LLC or an individual.
If the owner is an LLC, Reonomy allows you to pierce the owning entity to uncover true owner names. Simply click Unlock TrueOwner to see the members and holding companies associated with the owning-LLC, along with phone numbers, emails, and mailing addresses to use for direct outreach to decision-makers.
Uncovering true owners and their contact information is arguably one of the most important steps to your Opportunity Zone investment search. Its this information that will unlock new levels of deal-making.
How To Find An Opportunity Zone
Opportunity zones are shining the spotlight on parts of the country that have been typically passed over when it comes to investing. Although it may seem like a daunting task, finding an opportunity zone, especially through a qualified opportunity zones map, is easier than you think.
Take a peek at the list of designated qualified opportunity zones in IRS Notices 2018-48 . The list is organized in alphabetical order by state and includes all of the population census tracts that the Treasury Secretary designated as opportunity zones. You can also find a map of opportunity zones on the EIG website.
In order to find out if an investment is in an opportunity zone, you can search by address online using the Census Bureaus Geocoder tool to determine the census tract in which a specific address lies. You can also then use the opportunity zone mapping system or the list of designated qualified opportunity zones to determine the status of that census tract.
To stay abreast of updates to opportunity zones, one public policy group that played a role in creating the program, the Economic Innovation Group, created a resource page that links to an interactive map and state-by-state opportunity zones updates. On this site you can explore an individual states opportunity zone program, such as how many areas received the designation as well as the population and employment statistics in each zone.
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Opportunity Zones And Real Estate Investing
Posted by Brian Pearl on Thursday, April 25th, 2019 at 6:00pm
Savvy real estate investors throughout Boca Raton and Delray Beach are already taking advantage of the savings that a little-known change to the tax code has provided. Dubbed Opportunity Zones, these designated sections encourage new development and investments in distressed areas by way of preferential tax treatment.
The best part? Local examples of Opportunity Zones in Delray Beach are currently available for development.
Will The Current Administration Change The Oz Program
Opportunity zones were created under the Trump administration. So far, Merkel said, the Biden administration said that it would not alter the program.
Now, the concern is whether theres too much government subsidy going into the economy and too much investment, he said. Thats probably going to temper the program going forward.
The $1.2 trillion infrastructure bill passed on Nov. 15 and the administration recently finalized its proposed reconciliation billneither mentioned opportunity zones, Helberg said.
Could a piece of one-off legislation happen? Its certainly possible, he said. But it seems things may remain as they are for the time being.
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The Tax Benefits Of Investing In Opportunity Zones
To qualify for the tax incentives, investors must invest the gains from a sale of a prior investment within 180 days. Only the gain or profit must be rolled into an Opportunity Fund, not the original principal. And only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.
The tax incentives can be realized in one of three ways:
- A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund
- A step-up in basis for capital gains reinvested in an Opportunity Fund
- A permanent exclusion in taxable income of capital gains if the investment is held for at least 10 years
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Hemp Opportunity Zones Explained
Hemp, a non-psychoactive form of cannabis, was removed from the Controlled Substances Act with the 2018 Farm Bill. Any Cannabis sativa L. that has no more than 0.3 percent of the psychoactive compound delta-9-tetrahydrocannabinol on a dry weight basis is therefore legalized federally. Hemp is often used as food for humans and animals, for creating commercial products like textiles or rope, and even bioplastics or biofuel. It’s also used to create a durable building material called hempcrete, which is nontoxic mold-, fire-, and pest-resistant and carbon negative, among other benefits.
A CEO of a state is able to nominate an opportunity zone for hemp designation if the area is facing economic obstacles due to lack of resources, has mutually reinforcing state local or private aid, or is an area poised for economic growth that needs access to a larger commercial hemp market and will result is the highest rate of return for investing.
While many other opportunity zones focus on urban development, 40% of the nearly 9,000 communities designated so far are rural. Since hemp will grow in most parts of the country except arid desert and high-elevation mountainous regions, most of these areas have the potential to become Hemp Opportunity ones.
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Additional Benefits To Investing In An Opportunity Zone
We mentioned earlier that the new Opportunity Zones program has included residential rental properties, something that previous programs did not. The purpose of this is to provide more possibilities for property investors looking to re-invest the profits from their first real estate investment. This can be a great way to grow and diversify your investment portfolio. Furthermore, this lowers the risks of investing in Opportunity Funds while still allowing you to enjoy the tax benefits of the program.
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This is how the process goes. After selling an investment property for profits, a real estate investor will have 180 days to re-invest in an Opportunity Zone to defer paying capital gain tax on these profits. He/she can re-invest through buying shares in the Opportunity Fund or even distribute the money across a number of funds. The latter option, in fact, is smart because it can offer exposure to various markets across the country. After a real estate investor re-invests the profits, he/she now gains tax benefits depending on how long he/she holds on to the investment.
What Are The Benefits Of Investing In Real Estate In An Opportunity Zone
Invest in an Opportunity Zone and gain major tax benefits on your real estate investment!
Opportunity Zones are a new community development program established by Congress in the Tax Cut and Jobs Act on December 2017. Due to the relative newness of this program, most real estate investors are not familiar with or understand what an Opportunity Zone is. If this is your first time hearing about the Opportunity Zones program, the first thing you should know is that it has the power to transform real estate investments. Read more to learn what exactly an Opportunity Zone is, how the program works, and the benefit that you, as a real estate investor, will enjoy from investing in an Opportunity Zone.
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Ozs May Simplify Investment Portfolio Diversification
In August of this year, The Council of Economic Advisers published The Impact of Opportunity Zones: An Initial Assessment.6 The CEA report compares the advantages of OZs to other Federal economic development programs, and documents the characteristics of the over 8,700 low-income communities designated as Opportunity Zones.
For investors, one of the key benefits of placing capital gains in an OZ may be the ability to easily diversify an investment portfolio. Thats because a large percentage of Qualified Opportunity Funds used to invest in OZs have pooled investments across other industries in the OZ, such as health care, technology, and construction in addition to real estate:
- 45% of QOFs are pooled investment funds across various industries
- 22% focus on multiple real estate asset classes
- 18% invest in commercial real estate
- 9% invest in other assets such as businesses or infrastructure
- 6% invest in residential real estate
Choices For The 180 Days Rule
The original Opportunity Zone proposed regulations stipulated that investors have 180 days after realizing capital gains to invest those gains in an Opportunity Zone Fund, and this still holds true within the final regulations.
However, the final regulations also clarified rules specifically for investors in partnerships or S corporations. For these investors, if their entity realized capital gains, but such entity chose not to deploy such gains in a Qualified Opportunity Fund and instead chose to report such gains to its partners , the investors have two additional choices. They can elect to start their 180-day period from the last day of the tax year or they could start the period from March 15 of the following year, which is the day the partnerships tax returns are due without extension, rather than the date of realization. Investors must pick one of the three options for each investment and cannot mix and match between the three options.
For example, if Investor A sells their shares in Stock X and earns $100,000, $50,000 of which is capital gains, they have 180 days from the date of the sale to deploy the $50,000 in an Opportunity Zone Fund.
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What Tax Incentives Can Investors Claim
There are three types of tax benefits investors can claim for investing unrealized capital gains in Opportunity Zone Funds. Investors can take advantage of one or more of these benefits.
- Tax Deferral Unit 2026: Investors can invest assets with capital gains into opportunity funds. This defers the tax on the capital gains until 2026 or until the asset is disposed.
- Basis Step-Up Of Deferral Gains: Capital gains in an opportunity fund for 5 years have an increase of 10% on the original investment. If the investment is in an opportunity fund for 7 years, the increase is 15%.
- No Taxation On Appreciation Of Capital Gains Investors pay no taxes on capital gains produced through investment in opportunity funds when theyre held for at least 10 years.
The purpose of these benefits is to incentivize investment in areas where investment could result in substantial improvement.
Your First 4 Steps For Investing In Opportunity Zone Real Estate
Real estate investors are always looking for an edge. Whether its ways to find the best property, how to negotiate the best financing, or how to assemble the best real estate team, every little advantage matters.
That mindset is what makes investors successful.
And that mindset means that real estate investors need to know how they can take advantage of Opportunity Zones.
Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017 to spur economic development in specifically designated areas. The announcement generated some buzz, but relatively little was made of how SFR and multifamily real estate investors could capitalize.
This is good news, because it means that investors who study Opportunity Zones and strategically take advantage still have time to move ahead of the curve and gain an edge.
And theres even better newsthe kinds of investments that are eligible for Opportunity Zone benefits are projects that many real estate investors are already doing. So by doing just a little extra legwork, investors can set themselves up for Opportunity Zone success.
Opportunity Zone-eligible investments enable investors to gain two big tax benefits:
Any gain on the sale of qualified Opportunity Zone Property is tax-free after a 10-year hold period.
That combination can lead to a big payoff down the lineespecially for real estate investors who are already purchasing and holding non-owner-occupied properties in designated Opportunity Zones.
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What Investors Must Know About Opportunity Zones Before 2022 And Beyond
There isnt much time left for real estate investors to take advantage of one of the biggest perks of opportunity zones.
Opportunity zonesa program started under the Tax Cuts and Jobs Act of 2017are economically distressed areas where the government hoped to create jobs and increase spending through tax incentives to investors.
The perk, coming to an end on Dec. 31, is a 10% exclusion of the deferred gain if the OZ investment is held for at least five years.
For example, if an investor has $1,000 in capital gains, puts that money into an opportunity zone investment before Dec. 31 of this year and holds it through the same time in 2026, they receive the benefit of having 10%, or $100, excluded from tax.
The Dec. 31 deadline is drawing increased interest from real estate investors. Weve seen a slight uptick in the last few months of people who are looking to take advantage of the program and see that tax benefit, said Troy Merkel, senior real estate industry analyst and partner at RSM.
Craig Mason, tax partner at RSM, expects that there will be an influx of money into opportunity zone investments in the final weeks of 2021.
People have more confidence in the economy and the state of the real estate market now, Mason said. With the deadline approaching, theres no reason to think that opportunity zones will not attract additional capital.
Here are a few questions investors must ask themselves about opportunity zones before investing.
Why Choose Opportunity Zone Areas
You might be wondering why invest in an opportunity zone area vs putting your money to work in a publicly traded real estate investment trust, or REIT.
REITs offer individual investors a chance to participate in the commercial real estate market without purchasing and managing a commercial property outright.
Essentially, the trust is a publicly-traded corporation that holds at least 75 percent of total investable assets in real estate, gets at least 75 percent of its income from rent or mortgage interest, and pays at least 90 percent of taxable income to shareholders as dividends.
Those interested in adding commercial real estate to their portfolio can purchase REIT shares, just as they would buy stock in any other corporation.
Historically, share prices have fluctuated with the larger market, and downturns in the economy have equated to declines in REIT value though perhaps to a lesser extent.
The main concern with REITS is this: as a publicly-traded company, value is determined in the court of public opinion, and REITs are subject to systemic risk. A bit of bad news about a project can decimate stock prices.
Privately-held real estate assets are more insulated from systemic risk, which gives EquityMultiples platform an advantage.
It puts individuals in a position to invest in private market commercial real estate, just like institutional investors do.
Examples include senior living facilities, manufactured home communities, data storage centers, and student housing.
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Defining An Opportunity Zone
Opportunity Zones came about as a result of the 2017 Tax Cuts and Jobs Act. The Investing in Opportunity Act contained in this legislation allows State and local governments to work together to identify economically-distressed areas ripe for reinvigoration via private capital.
Interested parties can take advantage of the tax benefits offered by investing in both real estate and/or businesses within Qualified Opportunity Zones.
It is important to note that Opportunity Zones differ from a 1031 exchange, and are best utilized as a long-term investment.
Benefits Afforded By Investment In Opportunity Zones
While there are several ways in which to take advantage of investment in Opportunity Zones, perhaps the most enticing involves capital funneled to a Qualified Opportunity Zone, which receives a step-up in basis to the fair market value of the investment, as of the date of sale or exchange. This amount can be attributed to capital gains from holdings of at least 10 years.
In addition, invested capital benefits from tax deferment on gains up until 12/31/2026, and increased step-ups in tax basis can be gleaned based on the length of holdings between 5 and 7 years.
However, before investors can reap these benefits, a Qualified Opportunity Fund must be established. This requires the eligible partnership or corporation to self-certify via Form 8996 on their federal tax return.
Furthermore, the deference of taxation is only eligible for the targeted gains if they are invested in a Qualified Opportunity Zone within 180 days, and the purchased asset must be significantly improved upon within the following 30 months.
Of course, consulting with a financial advisor or tax specialist should be the first step prior to purchasing any property within an opportunity Zone.
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