As you know, we’ve been discussing Opportunity Zones (OZs) over the past few weeks, and the opportunity they afford for the right type of real estate investor. And while the rules around OZs can be somewhat confusing, we thought it was important to leave you with a simple and clear understanding of their potential benefits and restrictions.
Where to Look
First, if you are considering a real estate investment in an Opportunity Zone, you’ll want to know where these areas exist. Fortunately, there are OZs in every state and you can find a map of them here.
But that’s only part of the equation. Just because you now know where OZs are, doesn’t necessarily mean there’s a suitable opportunity. There needs to be motivated sellers and properties that offer significant upside in areas ripe for improvement or regentrification. Finding these prospects requires research and the skilled hand of a quality real estate investment firm.
For communities that are designated as OZs, the potential benefits are obvious. A depressed area in economic decline can be reinvigorated with an entirely new and promising future. With new investment, typically comes new job growth. And with improving employment, historically comes more spending and economic expansion.
For investors, I believe the main benefit of reinvesting eligible gains into an Opportunity Zone property is the ability to avoid paying taxes on the appreciation of the investment. Of course, there are rules that need to be strictly adhered to, including but not limited to:
- The investment must be deemed a long-term hold of at least 10 years or longer
- An investor must double down on the investment. For example, if an asset is purchased for $5 million, the investor must commit to making an additional investment or improvement of at least $5 million + one dollar
- All improvements must be completed within 30 months
- Currently, only investors with eligible gains to invest from the sale of a capital asset can enjoy the potential tax benefits. A regular cash investment does not qualify
A Sample Investment
It may help you to understand the mechanics of an OZ investment by looking at an example.
You and a group of other investors agree to buy an asset for $5 million. Your plan is to build an apartment complex for an estimated cost of $25 million so you now have $30 million invested. You add a $15 million mortgage, so that means you need to raise $15 million. You sell the complex ten years later $40 million. The $10 million appreciation you’ve now realized from your original $30 million investment is not subject to any tax.
Hopefully you now have a clearer picture of the OZ opportunity and how it works. As mentioned earlier, the rules and regulations of Opportunity Zone investments can be quite detailed, so we always recommend you consult with your tax professional.
Do you have more questions about Opportunity Zones? Feel free to contact our team today.