Calling All Investors: The Tax Incentives of Investing in Real Estate in an Opportunity Zone

Real estate investors – and realtors – are buzzing about the new tax incentives for investing in economically distressed areas that are designated by state governors as “Opportunity Zones,” in counties all over the country – including Sarasota, Manatee, and Hillsborough County. Compliments of the new Tax Cuts and Jobs Act, this new tax benefit will allow investors who invest their capital gains in certain investment businesses, called Qualified Opportunity Funds (“QOF”), to immediately defer tax on capital gains that have been invested in the fund and, if the interest is held for certain periods of time, to enjoy an exclusion from income for a portion or all of the deferred gain. As with most tax laws, this tax incentive may seem a bit complex, but this blog is intended to give a brief overview and highlights of the Opportunity Zone Program, and the tax incentives offered.

There are currently 42 designated opportunity zones, in Sarasota, Manatee, and Hillsborough County combined, that qualify for the program. You can access the map of these zones and other opportunity zones in Florida at:

https://deolmsgis.maps.arcgis.com/apps/webappviewer/index.html?id=4e768ad410c84a32ac9aa91035cc2375

What does this mean for realtors and real estate investors? Opportunity Zones are a powerful marketing tool for realtors to list and sell properties in opportunity zones to buyers (QOFs). Buyers, that have formed QOFs, are eagerly looking to purchase real estate, located in these zones. For individuals and real estate investors, this is an opportunity to create a fund, or invest in an existing fund, and enjoy special tax benefits including temporary deferral and exclusion of capital gains from income on property purchased in opportunity zones. In a nutshell, the program is designed to allow an investor that realizes a gain from the sale or exchange of property to an unrelated party, to purchase an interest in a QOF, using their cash capital gains, within 180 days from the date of the sale or exchange.

How does it work? Basically, an individual sells property and uses the capital gains to buy an interest in a QOF. The QOF, which is a partnership or corporation that is formed to invest in eligible property that is located in an opportunity zone, then purchases property in an opportunity zone. A few key points for a buyer/QOF and realtor to know is that the QOF must:
• purchase the property after December 31, 2017 to qualify (individuals or entities who owned property in opportunity zones prior to December 31, 2017 do not qualify);
• either the original use of the property in the zone must begin with the QOF (for example, purchase vacant land and build on it so the use of the building will begin with the QOF) OR
• for pre-existing structures, “substantially improve” the property purchased by essentially doubling the value of the property in 30 months (so a QOF cannot purchase vacant land or an existing building and do nothing with it); and
• hold 90% of its assets in opportunity zone property.
It is the QOF, not an individual that is required to purchase the property in the opportunity zone. For individuals that invest in a QOF, they will receive a temporary tax deferral on gains, and there is a 5, 7, and 10 year period of time in which the interest in the QOF must be held, in order to exclude some or all of the capital gains from income. This means that individuals and investors can potentially avoid paying capital gains tax on some of their gain on the sale or exchange of their investment interest.

Illustrative Example:

In 2018, Ivan Individual sold stock and made a $300,000 profit on the sale. Ivan decides to invest the gain in a QOF. With the assistance of Savvy, the realtor, the QOF then purchases an old building in an opportunity zone, renovates the building, and leases the space. Ivan gets an immediate deferral of gain on his current year’s (2018) tax return. If Ivan holds his interest in the QOF for 5 years, then sells or exchanges the interest, he can exclude 10 % of the deferred gain from income, which is $30,000. If Ivan held his interest for 7 years, then he could exclude 15% of the deferred gain from income, which is $45,000.

There are more details and requirements for forming and holding interests in a QOF that are beyond the scope of this blog. For more information on creating a QOF, or on Opportunity Zones in general, please contact your local real estate or tax attorney. You can also visit the Tax and Estate Planning section of our website, berlinpatten.com, for an article on Opportunity Zones.

Sincerely,
Berlin Patten Ebling, PLLC

Article Authored by Pamela Hernandez, Esq. phernandez@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

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New Tax Incentive for Investors

Get in the Zone: New Tax Incentive for Investors

In an effort to prompt investments, increase jobs, and reduce poverty in some of America’s most economically distressed communities, Congress provided a tax incentive for investors to receive preferential tax treatment, while investing in areas designated as Opportunity Zones. Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act (“TCJA”)…
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