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Investor Interest in Opportunity Zones Accelerates

By Jeffrey Bangerter

Opportunity Zone investing appears to be finally hitting its stride among taxpayers seeking to defer capital gains taxes on a wide array of assets. Some might argue the estimated $75 billion1 invested in Qualified Opportunity Zone Funds (QOFs) as of August 2019 falls short of the optimistic estimates when the Opportunity Zone Program rolled out as part of the 2017 Tax Cuts and Jobs Act.   

While the coronavirus pandemic in 2020 may have suppressed investor interest, the program now appears to be gaining significant momentum.

The stage is set for 2021 to be the year opportunity zones reach their hyped potential. - Forbes.com2

You may remember the program was developed to incentivize private investment in economically-distressed areas throughout the U.S., identified in over 8,700 census tracks submitted by state governors and certified by the Treasury.

Tax-Advantaged Triple Play

A QOF investment affords the investor tax advantages that come in three forms.

1. Tax Deferral

Investment rules stipulate the taxpayer can invest the capital gains from the sale of any property (not just real estate) in a QOF. The investment has to occur within 180 days of when the gain was recognized. Taxes on those gains are deferred until December 31, 2025, or the QOF's disposition, whichever occurs first.

2. Tax Reduction

If the taxpayer invests capital gains before December 31, 2021, and remains invested for at least five years, the amount of the gain on which taxes are owed is reduced by 10% of the original gain.

3. Tax Elimination

Perhaps the most compelling tax advantage is investors' ability to avoid paying any tax on the appreciation of the deferred gain as long as the investment is held for at least ten years.

Rules Aplenty

Opportunity Zone investments got off to a slow start because many of the rules had not been fully defined when the program was introduced in 2017. Since then, the IRS issued two additional notices clarifying many of the questions raised by investors, sponsors, and developers. The final regulations are now complete.

When considering a QOF investment, it is worth having a cursory understanding of a few investor requirements, including:

Taxpayer Eligibility

Regulations deem the following as eligible investors:

  • Individuals
  • Partnerships
  • C Corporations
  • S Corporations
  • Trusts
  • Estates
  • REITs
  • Certain other pass-through entities

What Qualifies as an Eligible Gain?

Unlike the popular 1031 exchange, which extends tax-deferred benefits to taxpayers but only when exchanging real estate investment property, Opportunity Zone investment rules are much more forgiving. The rules allow for the deferral of capital gains on the sale or exchange of any property type, including:

  • Land or real estate
  • Primary or secondary residences
  • Businesses
  • Equipment
  • Stocks, bonds, and other investments 

Recent Extensions

Initially, investors could roll their capital gains into a QOF as long as the investment occurred within 180 days of the property sale. But with so many disruptions from COVID-19 last year, the IRS issued a Notice 2021-10 in January 2021, extending the 180 days for certain investors3.

As the rules apply today, if the investor's capital gain event occurred:

Before October 4, 2019, the deadline to invest has passed.

Between October 4, 2019, and October 2, 2020, the deadline extends to March 31, 2021.

After October 2, 2020, the deadline is 180 days after your recognition event.

New Administration. New Rules?

When President Biden was campaigning in 2019, he made it very clear he would fund the $775 billion "caregiving and educations jobs" portion of his Build Back Better plan by rolling back tax breaks for real estate investors with incomes over $400,000. According to campaign officials, the 100-year tax-advantaged 1031 exchange program was sitting squarely in the crosshairs.

Many thought the Opportunity Zone investment program's investment incentives could put it in jeopardy as well. And while Biden has spoken about the need for greater oversight of the program to ensure the communities in greatest need are receiving attention, he is generally supportive of Opportunity Zone development and investments.

So, while the administration may come forward with new guidelines and requirements, Biden has indicated he may even provide additional incentives for investors who work with community organizers to develop a "community benefit plan" for each investment.4

We hope this introduction to Opportunity Zones has helped explain why you may be hearing more news about these investment opportunities.  You can gain additional insight into the programs by downloading your free copy of our eBook, The Opportunity with Opportunity Zones.   

Bangerter_Financial_Opportunity_with_Opportunity_Zones

1 https://www.fool.com/millionacres/taxes/articles/opportunity-zones-could-stand-up-and-stand-out-in-2021/

2 https://www.forbes.com/sites/jasonbisnoff/2021/01/15/after-rocky-start-opportunity-zones-could-boom-in-2021/?sh=63ba4d606cd4

3 https://opportunitydb.com/2021/01/ashley-tison-122/

4 https://www.jdsupra.com/legalnews/looking-ahead-to-the-biden-7980283/

This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Bangerter Financial does not offer tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Investors should view the guide for more important information, such as risks involved. Investment advisory services offered through Bangerter Financial Services, Inc. A state Registered Investment Advisor. Registered Representative and securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Bangerter Financial Services, Inc. is independent of CIS.

Topics: Financial Planning Financial Advisor Qualified Opportunity Zones Opportunity Zones QOZ