19 Jun Opportunity Zones: A New Incentive for Real Estate Investors
Reading Time: 2 minutesIndividuals and businesses with appreciated assets will soon be able to take advantage of a new and lucrative investment program. The Opportunity Zone program is designed to promote and drive investments in low-income communities, and Governor Murphy has designated 169 Zones in all 21 counties of New Jersey as Opportunity Zones. In brief:
• Taxpayers must invest the capital gains from the sale of an appreciated asset in a Qualified Opportunity Fund within 180 days of the underlying sale and prior to December 31, 2026;
• The longer a taxpayer holds their investment in a Qualified Opportunity Fund, the greater the tax benefit. Investments held for at least five years receive a basis adjustment equal to 10% of the original deferred gain. If the investment is held for seven years, it will receive an additional 5% basis adjustment, totaling 15%;
• To qualify for the full 15% basis adjustment, the investment in a Qualified Opportunity Fund must be made before December 31, 2019;
• If the taxpayer holds the investment in the Qualified Opportunity Fund for at least 10 years, the taxpayer can exclude the entire gain on all appreciation of the Qualified Opportunity Fund during the investment period;
• A Qualified Opportunity Fund must invest at least 90% of its assets in Qualified Opportunity Zones.
The IRS is currently writing regulations to govern the implementation of this program. In addition, guidance is forthcoming regarding the requirements for creating and certifying Qualified Opportunity Funds. Unlike a 1031 exchange, which is limited to gain from real estate, gain from the sale of assets such as real estate, stocks, bonds, art, stamps, coins, antiques, and cars can be reinvested in a Qualified Opportunity Fund and be eligible for the favorable tax treatment.
Many of the Opportunity Zones are in New Jersey’s urban centers where almost every property is a Brownfield. This will require the services of a qualified and highly experienced environmental consultant to identify and mitigate the environmental exposure presented by such properties.
What about those who already own property in an Opportunity Zone? They will likely see increased interest in their properties as the Qualified Opportunity Funds look for potential investments. Given the substantial tax benefits applicable to such capital, the cost of such capital is likely to be lower than traditional capital sources. In addition, they can still exercise all of their rights under current tax laws, including the all-important 1031-exchange.
What’s in this for the real estate investor? First, by reinvesting gain in a Qualified Opportunity Fund they can defer the taxes owed from the sale of their asset until the earlier of the sale of the interest in the Qualified Opportunity Fund or December 31, 2026. Second, depending upon the timing of their reinvestment in the Qualified Opportunity Fund, they will receive up to a 15% discount on the taxes due from the sale of their asset. Lastly, if the real estate investor holds the investment in the Qualified Opportunity Fund for at least 10 years, the gain on the investment in the Qualified Opportunity Fund is fully non-taxable.
The window is about to open on this rare opportunity. The best and most lucrative investments will be snatched up first. As an industrial realtor, you need to be well-informed so you can advise your clients. ESA is accepting appointments to present this program to your sales staff so your firm will be ready when this program goes live. For more information or to make an appointment, call Stephen Fauer at 732-469-8888 x201.