Should You Invest in an Opportunity Zone? A Commercial Real Estate Analysis

By Joe Killinger

Let’s start by defining what an opportunity zone is -  

Opportunity Zones are census tracts generally composed of economically distressed communities that qualify for the Opportunity Zone program, according to criteria outlined in 2017’s Tax Cuts and Jobs Act.   

These zones were designed to promote economic development by providing tax benefits for investors. Up to 25% of low-income neighborhoods that meet the income qualifications of the program (and up to 5% of non-low income tracts that meet other income and geographic requirements) in each state, district, or territory can be designated as Opportunity Zones.

In states, territories, and districts with fewer than 100 census tracts, up to 25 census tracts can be designated as Opportunity Zones. Areas certified as Opportunity Zones retain their designation for ten years.

Essentially, an Opportunity Zone works as follows: 

A provision of the Tax Cuts and Jobs Act of 2017 allows investors to enjoy preferential tax treatment when investing in economically-distressed communities.

The opportunity zone program allows individuals and businesses to liquidate a wide variety of appreciated capital assets and to reinvest all or a portion of the gain into qualified opportunity funds within 180 days of triggering the gain. “The gain can then be deferred up until Dec. 31, 2026.”

This investment will also allow for deferring capital gains tax during the investment period as well as excluding some of the deferred gain depending on how long the investment is held. 

Essentially, there is a 10% exclusion of the deferred gain if the Qualified Opportunity Fund is held for longer than 5 years. If held for more than 7 years, but less than 10 years, the 10% exclusion becomes 15%.

Finally, if you hold the investment through the 10-year mark or beyond, the investor will exempt from any gain that accrued after the original re-investment, and is eligible for an increase in the basis of the investment equal to the fair market value on the date that the investment is sold or exchanged. By offering these tax incentives, the government is hoping to create long-term investments in areas where investors previously did not want to invest.

Qualified Opportunity Fund

To become involved with these opportunities you need to find a Qualified Opportunity Fund to invest with, the fund will locate and acquire the property within the zone and you will then invest in that fund. Make sure you do complete due diligence prior to investing with anyone.

Think as long-term as you can prior to making this investment, consider your exit strategy, and also how is this partnership you are investing in is set up, Limited Liability Companies taxed as partnerships will likely produce the best tax results during the operating phase, as well as upon disposition, and like all investments, we recommend that you speak with your tax consultant or CPA to determine if this type of investment is best for you.