“Everything You Need To Know About Opportunity Zones
GlobeSt.com spoke with Real Estate Roundtable CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick to get a better understanding of how this program will work.
By Erika Morphy | July 16, 2018 at 04:00 AM
WASHINGTON, DC–One of the many provisions of last year’s tax overhaul was the creation of a little-noticed program called Opportunity Zones, which was designed to give investors tax breaks for investments in designated areas.
Little was heard about the program as governors went through the process of selecting where the Opportunity Zones would be located within their jurisdictions. Then last month the Treasury Department formally designated over 8,700 low-income communities around the country as Opportunity Zones. Now attention is starting to pick up as the program takes shape. The real estate community is expressing a lot of interest in the program and so far at least one investment firm has launched an Opportunity Zone fund.
To get a better understanding of how this program will work and what it may mean for the real estate community, GlobeSt.com spoke with Real Estate Roundtable President and CEO Jeffrey DeBoer and Roundtable Senior Vice President and Counsel Ryan McCormick. Following is a lightly-edited transcript of that conversation.
What is the Opportunity Zone program and how does it relate to real estate?
DeBoer: The point of the program is to encourage capital formation and patient, long-term investment in these areas by reducing or eliminating capital gains taxes for taxpayers investing in newly established Opportunity Funds. An Opportunity Fund itself is created in the private sector, and it may be organized as a partnership or corporation. Thus, a qualified fund may be owned by a single individual, by a small number of partners, or by a large pool of investors operating with a professional fund manager. Opportunity Funds can invest in income-producing real estate located in an Opportunity Zone, such as an apartment complex, shopping center, or office building.
Depending on how the Treasury Department drafts the implementing rules, Opportunity Zones could be a powerful new tool for mobilizing capital for real estate projects that create jobs, improve communities, and spur economic growth. In the real estate industry, there is a tremendous amount of interest in Opportunity Zones right now. But there are also many unanswered questions. The Real Estate Roundtable is meeting regularly with lawmakers and Administration officials to provide industry feedback and support the implementation process.
How do the Opportunity Zones’ capital investment tax incentives work?
DeBoer: In short, capital gain from prior investments — proceeds from the sale of real estate, stocks, securities, etc. — can be rolled into an Opportunity Fund and the tax that would otherwise be owed on the gain from the prior investment is deferred and not taxed until the end of 2026. Second, capital gains tax on this deferred gain is reduced by 10% if the investment is held for five years or 15% if the investment is held for seven years (through a tax basis “step-up”). Third, capital gain generated from the investments made by the Opportunity Fund are exempt from capital gains tax altogether if the investment in the Opportunity Fund is held for at least 10 years.
Thus, Opportunity Zones incentivize capital investment in two critical ways: (1) the deferred and reduced tax owed on capital gain that is rolled into an Opportunity Fund, and (2) the elimination of capital gains tax on the subsequent gain from long-term Opportunity Fund investments.’