By Sam Silverstein, CAR
The Opportunity Zone
New Deal for Investors in 2017 Tax Overhaul
A
Top Producing Team
Gilroy Offi ce, 2015, 2016, 2017
Sean Dinsmore, Realtor
Intero Real Estate Services
www.TheDinsmoreTeam.com
408.710.2855
DRE #01966405
Marta Maloney, Realtor GRI
Intero Real Estate Services
www.TheDinsmoreTeam.com
408.710.0571
relatively unheralded section of the 2017 federal tax overhaul offers patient
investors a deal that could be too good to turn down. The launch of the
qualifi ed opportunity zone program means that in return for rolling over the
profi t from the sale of a capital asset like real estate or company stock into certain
economically disadvantaged areas, investors can delay paying capital gains taxes on
those profi ts through 2026.
What’s more, if an investor retains an opportunity zone
investment for at least five years, 10 percent of the initial
investment is excluded from being taxed. After seven years, that
figure increases to 15 percent. “This is being called the biggest tax
break in our lifetime,” says Tiffany Lewis, a broker in Spokane,
Washington, who focuses on working with residential property
investors. Any increase in the value of the new investment will
be tax-free after 10 years.
Opportunity zones are similar in some ways to 1031 like-kind
exchanges, which permit real estate investors to defer taxes on
gains from the sale of a property by reinvesting the proceeds from
the sale in another property within six months. A key difference is
that 1031s do not allow investors to permanently-exclude any portion of their profit
from taxes, which the opportunity zone program allows for investments held for at
least five years.
To take advantage of the tax benefits, investors need to invest capital gains
in vehicles known as qualified opportunity funds, which aggregate money from
investors and use it to acquire and improve properties in opportunity zones, within
180 days of the sale of an asset. Investors can choose to work with an existing
opportunity fund that plans to invest in an area or type of property they want to put
money into, or form their own fund. For their part, opportunity funds must invest
at least as much in improving a property as they pay for it, and are required to invest
90 percent of their assets in properties located in opportunity zones.
To qualify as an opportunity zone, an area must either have an individual poverty
rate of at least 20 percent and median family income of no more than 80 percent
of the median income for the area where it is located, or border an area that meets
those criteria. An area designated as an opportunity zone based on its proximity
to a low-income district has somewhat looser criteria: median income that is no
more than 125 percent of that area’s median income. Zones are located in urban,
suburban, and rural parts of the country.
Wide Investor Appeal
It is critical to evaluate an area’s growth potential and the level to which it is already
receiving or slated for public and private investments before deciding to invest money
there. “You need to know the zoning laws and where the developable lots are,” says
Lewis.
Teya Moore, principal broker with Benjamin and Banks Real Estate in Bowie,
MD, says opportunity zones are particularly attractive to investors interested in
commercial projects such as shopping centers and housing developments. The
requirement that opportunity funds dedicate a large portion of their investment to
improving a property they invest in means that fund managers are unlikely to be
interested in acquiring individual homes unless they plan to demolish the property
and replace it with a new commercial or residential project, she says. “It’s not often
that you buy a house for $100,000 and spend another $100,000 on renovating it.”
DRE #01352339
Continued on page 81
GILROY • MORGAN HILL • SAN MARTIN
june/july 2019
gmhtoday.com
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