Real estate investors are excited about a new investment tool aimed at economically-distressed urban and rural communities across the United States. It’s called the Qualified Opportunity Zone program. As part of the Tax and Jobs Act of 2017, this program provides real estate opportunities for private investors with fewer restrictions (e.g. a limited number of tax system credits and annual congressional approval) than those found in other low-income revitalization programs, such as the New Markets Tax Credit Program and Low Income Housing Tax Credit Program.
The Chief Economic Officer of each state nominates a census tract as a Qualified Opportunity Zone. According to Fundrise, there are over 8,700 zones in the U.S., including Washington D.C. and Puerto Rico. It has even predicted the top ten opportunity zones with the most growth potential based on home value and population increases. Los Angeles is such an area with downtown home prices increasing nearly 32% over a five-year period (2013 -2018). These communities, along with the companies that support the new construction, will greatly benefit from the economic development. New Transportation hubs are also being built in or adjacent to them.
Investing in Opportunity Funds
Investing is done through an Opportunity Fund, in which a U.S. partnership or corporation invests 90% of its assets (e.g. stocks) in the opportunity zone. The name is misleading since an Opportunity Fund is not set up like other funds, in which there is a portfolio. New guidelines have clarified what an Opportunity Fund is and what it can entail. It can now consist of multiple properties, thus creating a diversified portfolio. What makes this program stand out are that the opportunity funds are managed privately instead of by the U.S. Treasury Department and investors receive capital gain tax incentives (immediate and long-term). To certify that the 90% of holdings are met, opportunity funds can “self-certify,” which is done as part of their tax returns (Form 8996). The Internal Revenue Service has divided the program into two coded sections: 1400Z-1 (QOZ) and 1400Z-2 (Opportunity Funds).
While the Qualified Opportunity Zone program and Opportunity Funds have their own criteria that must be met, business properties must meet theirs as well. For example, the business property must be at least 70% in an Opportunity Zone. Also, the investment must “substantially” improve the business property. This means a renovation must at least double the property value.
The Qualified Opportunity Zone program is a win-win for investors and residents. The investors receive generous tax benefits and the communities enjoy new homes, shops, and restaurants.