How Do Opportunity Zones Impact Commercial Real Estate Sales and Investing?

It's been well over a year since the Tax Cuts and Jobs Act came into effect, yet there are still many who don't understand it entirely. One area covered by this bill that is still baffling many real estate investors is opportunity zones.

With that in mind, we wanted to thoroughly explain opportunity zones and tell you how they impact commercial real estate. 

What Are Opportunity Zones?

Opportunity zones were introduced in 2017 by the Tax Cuts and Jobs Act to encourage economic growth in struggling areas. Places in the U.S. which require some assistance with development are now designated as opportunity zones, and they offer several tax incentives for long-term investments.

The opportunity zones program provides three main types of tax incentives for all investors:

·         Capital gains tax deferment (paying taxes at a later date)

·         Capital gains tax reduction (paying fewer taxes)

·         Capital gains tax elimination (paying no taxes)

The three main tax incentives should be more than enough for most investors to start investing or buying. However, it’s not as simple as that. There are always additional stipulations, especially when we’re looking at different types of real estate.

Opportunity Zones Impact on Commercial Real Estate

First of all, not all opportunity zones have commercial real estate. The IRS and the U.S. Treasury said that there are 8,700 commercial opportunity zones in the country (plus the territories), which is still more than enough. If you're interested in knowing which areas of the country are designated as commercial opportunity zones, you can take a look at this map. 

The good thing about these zones is that they were designated according to a census done in 2010. Many of the areas which qualified as opportunity zones are well developed now and are thus well worth further investment, especially where commercial real estate is involved. 

To understand how beneficial opportunity zones can be for commercial real estate investments, you should know that many hot spots are part of them. For example, the Downtown Los Angeles Arts District is an opportunity zone. 

Now, how can you benefit from these zones? 

First, you must invest through a Qualified Opportunity Fund to qualify. The funds can be used either directly (to purchase or improve a property), or indirectly (to acquire equity interests in corporations and partnerships). Naturally, it's possible to purchase or invest in one or more assets. 

It's also essential to notice that the commercial property needs to be within or partially within an opportunity zone. Almost all businesses are an option, except for country clubs, massage parlors, and liquor stores. 

When you invest, you need to make sure that you make substantial improvements to the property within the first 30 months to gain the desired tax benefits. That might sound like a short period, but it's worth it when you consider the fact that the longer you hold the property, the better the tax breaks become. 

When all of this is considered, commercial opportunity zones become worthy of an investment. If you want to know more, feel free to reach us at info@cbicommercial.com