There is a lot of talk about Opportunity Zones. Frankly, it is mostly more talk than action now, though that is changing. Real estate investors had not been provided much specific guidance from the IRS on what they can do with Opportunity Zones and how the near + long term mechanics of them work. There is enough info out there now, though still a few open questions. Some investors are jumping in to reap the benefits.
In a nutshell, Opportunity Zones are specifically defined areas that have low to moderate income populations who could benefit from economic stimulus. To encourage local investment of funds, improve local real estate, and build local businesses, OZs were created to entice investors via numerous tax benefits. If an investor significantly improves local properties or builds local business, they can take money from prior capital gains and get a tax reduction on those prior capital gains plus pay zero taxes on the new capital gains they have created through their efforts. Unlike 1031 exchanges, an investor can roll capital gains from stocks into a real estate acquisition in an OZ, and they can eliminate taxes on future capital gains. All are big wins, both for the communities in need and for the investors.
Why Were OZs Created?
OZs were created to incentivize investors to invest in and improve areas that could use economic stimulus via better real estate, new businesses and jobs, and a trajectory of growth and progress. This is a classic example of government using tools that it controls (tax benefits) to help direct external forces and funds (investors) to achieve societal goals (improvements in communities, employment, and citizen well being).
Where Are OZs Located?
They are located all over the country, in every state. Sometimes, they are in unexpected locations where the area would not generally be considered “low income” for the country though it may be considered “low income” in the context of other surrounding high income areas. They were all nominated for this designation by their associated state and then certified as an economically distressed community by the Secretary of the U.S. Treasury / IRS.
There are multiple online OZ mapping tools available, easily found via an Internet search. Click here for a good example. Then explore around your state and areas you know well to find where OZs are located. Think about why some areas were chosen and others were not. It is an interesting patchwork across the entire country.
What Are the Tax Benefits for Investors?
At a high level, here are the main benefits to investing in OZs:
- Temporary deferral of current capital gains taxes until 2026 (time value of money benefit)
- Tax reduction on those current capital gains (10% reduction after 5