Opportunity Zones are designated areas within the United States that have been identified as economically distressed. Created by the Tax Cuts and Jobs Act of 2017, these zones offer significant tax incentives to investors who choose to develop or invest in commercial real estate projects located within these communities.
At Daniels Greer Commercial Real Estate, we understand the potential benefits and challenges of exploring Opportunity Zones for commercial real estate development. In this blog, we will explore what makes Opportunity Zones an attractive option for developers and investors, as well as some of the obstacles that may arise.
What are Opportunity Zones?
Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017, with the aim of promoting economic development in distressed communities across the United States. These zones are designated by state governors and certified by the U.S. Department of Treasury.
There are a total of 8,700 designated census tracts that make up Opportunity Zones, covering all 50 states, Washington D.C., and five U.S. territories. These areas were chosen based on their low-income levels and other economic indicators.
The goal of Opportunity Zones is to stimulate economic growth and job creation in distressed communities by incentivizing private investment. The program offers three main tax benefits for investors:
· Temporary deferral of capital gains taxes: Investors can defer paying taxes on a current capital gain if they reinvest the money into an Opportunity Zone within 180 days.
· Partial reduction of capital gains taxes: If the investment is held for at least five years, the investor can reduce their capital gains tax by 10%. If held for at least seven years, the reduction increases to 15%.
· Tax-free appreciation: Investors who hold their investment in an Opportunity Zone for at least ten years are able to completely exclude any capital gains from the sale of that investment.
How do Opportunity Zones work?
Investors can take advantage of the tax benefits offered by Opportunity Zones by investing in Qualified Opportunity Funds (QOFs). These funds are used to finance new businesses, real estate developments, and infrastructure projects in designated zones.
One of the main benefits of investing in QOFs is the deferral of capital gains taxes. Investors can defer paying taxes on their capital gains until December 31, 2026, or until they sell their investment, whichever comes first. This gives them more capital to invest and potentially earn higher returns. Additionally, if the investment is held for at least ten years, any appreciation in value is tax-free.
Benefits of Opportunity Zones for Commercial Real Estate Development
Tax Incentives
One of the main benefits of investing in Opportunity Zones is the potential for significant tax savings. Investors can defer paying capital gains taxes until 2026 by reinvesting their gains into a Qualified Opportunity Fund (QOF), which is a partnership or corporation that invests in businesses or real estate located within an Opportunity Zone.
In addition, if investors hold onto their investment for at least five years, they can receive a 10% reduction in their deferred capital gains taxes. If they hold onto it for at least seven years, the reduction increases to 15%. And perhaps most appealing, investors who hold onto their investment for at least ten years can completely eliminate any capital gains taxes on the appreciation of their Opportunity Zone investment.
Diversification
Opportunity Zones offer developers and investors a chance to diversify their portfolios by investing in areas that they may not have considered previously. This can lead to opportunities for growth and expansion into new markets.
Community Impact
The ultimate goal of Opportunity Zones is to revitalize distressed communities by attracting investment and creating jobs. By investing in commercial real estate development in these areas, developers can make a positive impact on the local community and its residents.
Long-Term Investment Potential
With the requirement to hold onto investments for at least ten years to reap the full tax benefits, developers are incentivized to make long-term investments in Opportunity Zones. This can lead to more sustainable and impactful development projects that benefit both the community and investors.
Access to Capital
With the creation of Opportunity Zones, a new wave of investors has been attracted to these areas, providing access to much-needed capital for commercial real estate development projects. This influx of capital not only benefits developers but also helps stimulate economic growth and job creation within the designated zones.
Challenges of Investing in Opportunity Zones for Commercial Real Estate Development
Limited Timeframe
Investors looking to take advantage of the tax benefits offered by Opportunity Zones have a limited timeframe to do so. In order to receive the full 15% reduction in capital gains taxes, investments must be made by December 31, 2019. After this date, the reduction decreases to 10%.
Lack of Clear Guidelines
While the tax benefits of Opportunity Zones are well-defined, there is still a lack of clear guidelines and regulations surrounding their implementation. This can make it challenging for investors to navigate and fully understand the requirements and implications of investing in Qualified Opportunity Funds.
Potential Risks
As with any investment, there are potential risks involved in Opportunity Zones. Investing in distressed communities may come with additional challenges, such as higher crime rates or lower demand for commercial real estate properties.
Lack of Infrastructure
Many Opportunity Zones lack the necessary infrastructure and amenities needed for successful commercial real estate development projects. Developers may need to invest additional resources into the community to create an attractive environment for businesses and consumers.
Final Thoughts
Exploring Opportunity Zones for commercial real estate development can be a worthwhile endeavor, but it’s essential to thoroughly research and understand the benefits and challenges involved. At Daniels Greer Commercial Real Estate, we are committed to staying informed about this program and helping our clients navigate the process of investing in Opportunity Zones. We believe that by working together, we can make a positive impact on these communities while also achieving successful real estate projects. So, if you’re considering investing in an Opportunity Zone, don’t hesitate to reach out to us at Daniels Greer Commercial Real Estate for guidance and support. Call us today at (918) 740-1015 for more information.