Opportunity Zones - Yay or Nay?

Specialist · San Francisco · Member since 2018 · 29 posts · 8 votes

Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide.

The program was created by Sean Parker, founder of Napster and President at Facebook. Opportunity Zones are all the rage in Silicon Valley because of the massive tax breaks.

Do you think Opportunity Zones will benefit residents of low-income communities? Or will they speed up gentrification and increase displacement?

Look forward to your replies!!

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

You shouldnt let the tail wag the dog. If you happen to invest in an opportunity zone, by all means take advantage of the tax benefits of doing so. But to target an area based on that would be folly. These are locations that almost by definition will be high risk areas. You are being incentived to take a higher risk with your capital.

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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
7y
Originally posted by @John Woodrich:

Originally posted by @Tony Kim:
Turns out that the multi-unit I'm currently in escrow for is located right in the middle of an OZ between Exposition Park and MLK (for those of you familiar with the area).

Not complaining because this is certainly good news for me...but I have to really wonder how some of these OZs were decided.
Unless you are using tax deferred funds and planning for a major improvement your tax benefits will be $0... I think a lot of people are confused about these. This can be a big deal but I think the usefulness is narrow. It is likely to be used more by private equity groups and syndicators to raise capital and move it into the real estate sector.
No confusion here. I didn't mean it was good news for me because of any perceived tax benefit. It was thinking more along the lines of any potential development that may happen in my area. Might be marginal, but I'll take it.
Coincidentally, I am using tax deferred funds, but via 1031 exchange. I've been following some of the larger sponsors and syndicators that have announced plans to launch a QOZ fund with great interest and have listened to several webinars. I most likely would have gone that route if I wasn't able to find a property I liked (or will go that route if this deal falls through).
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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
7y
@Tony Kim I am not sure how much gain you are deferring through the 1031 but if you have to to QOZ you may still have a large tax bill. Unless it has changed only the capital gains portion is eligible. You may still have a lot of tax on deprecation recapture. Hopefully it all goes through as planned.
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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
7y
Originally posted by @John Woodrich:

@Tony Kim I am not sure how much gain you are deferring through the 1031 but if you have to to QOZ you may still have a large tax bill. Unless it has changed only the capital gains portion is eligible. You may still have a lot of tax on deprecation recapture. Hopefully it all goes through as planned.
Agreed. And to compound that issue, there is also the question of whether or not the State of California will allow me to defer their portion. I still haven't been able to find a definite answer...but my guess is no.
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Eli Ren
Member since 2018 · 15 posts · 8 votes
7y
open admission -CPA here-lots of excitement about OZ but a few points here
1-Economics rule so make sure your deal makes sense first and foremost
2-For a 1031 The entire proceeds has to be reinvested in order to gain a tax deferral while for OZ only the gain needs to be reinvested
3-For a 1031-you can defer for many years and get a step up in basis if the property is passed on as an inheritance while for the OZ the way its written now in 5-7 years you will have to pay some tax (either 90% or 85% of original gain)
4-on the other hand for OZ where else can you buy and hold for 10 years and get to FMV it and not pay tax?
5-For OZ-you can use any capital gain-stocks -does not have to be real estate you are disposing of it-so for all you hedge fund gurus out there or anybody holding stock that has a huge unrealized gain in it-you can now sell and put in an OZ fund
Hope that helps.
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Allan Szlafrok
Rental Property Investor · Long Island, NY · Member since 2015 · 490 posts · 301 votes
7y
@Jimmy Klein you have to make significant improvements to the property. Can’t just buy and hold.
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Matt Ward
Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
7y
Originally posted by @AJ Shepard:
@Jeffrey Holst @@Max Ball
I'm pretty sure there is still some guidance to come on the subject. But one point that I've heard discussed is the 100% improvement or development required is based on the existing structure, not the acquisition cost. Ie when you buy real estate portion is land, portion is improvements. Say you bought a 200k property and depending on where you bought it it may be 150k of land, and 50k of structure (improvements). In the OZ, you'd only need to put an additional 50k in construction improvement to qualify.
There is a little bit of wiggle room when buying real estate to classify in taxes what portion is land and what is structure ( structures are depreciated). But in the OZ it may be beneficial to classify less structure so as to to require less capital improvements.
Also, my understanding (as it stands now) is that you must "substantially improve" the property by investing an amount over 30 months equal to your un-adjusted basis in the property at the beginning of a 30 month period, and that 30 month period can be over any point of your overall hold period.
This provides the opportunity for significant planning with regard to investor risk and uncertainty.
Also, this is subject to change and simply an interpretation - I could be wrong as there are quite a few moving parts and many more that we are all seeking clarification on.
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Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
7y
Not for me. It is a lot more risk than I am comfortable with; yes there are incentives but that does not mitigate the risk sufficiently in my opinion.
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Jorie Aulston
Real Estate Broker · Miami, FL · Member since 2015 · 59 posts · 37 votes
7y
@Jeffrey Holst this is what I was going to say. Most of the areas I already invest in, are in OZ and they are not high-crime ridden or high risk areas. They aren't your Class A/B areas but they are very solid areas where we've already been investing for years. I've been researching the guidelines heavily to try to figure out exactly how it works.
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Jorie Aulston
Real Estate Broker · Miami, FL · Member since 2015 · 59 posts · 37 votes
7y
@Tony Kim come on you know how they were decided, lol. Remember they were decided by the individual states so there is a lot of influence involved in where they land. I'm not complaining though they are benefiting my investment areas too.
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Leigh Costain
Richmond, CA · Member since 2018 · 17 posts · 4 votes
7y
@Jimmy Klein you have to improve whatever you buy significantly to get the tax benefit. Also, it's a tax shelter for any gains you have now. In other words if you take money out if the stock market or sell a property for which the proceeds would be subject to capital gains, you may avoid all tax on the earnings by investing in an OZ.
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Leigh Costain
Richmond, CA · Member since 2018 · 17 posts · 4 votes
7y
@Max Ball an amount equal to what the structure was worth, not land + structure.
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Mark Nickoson
Rental Property Investor · Dayton, OH · Member since 2015 · 79 posts · 85 votes
7y
@Jameson Sullivan, I am a small time investor with only three properties. Over the years I've come to the conclusion that tax incentives is a good way to boost the return of your investments. But like you, I after looking at this tax incentive I concluded it did offer much to small guys like me.
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Matt Ward
Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
7y
Originally posted by @Mark Nickoson:

@Jameson Sullivan, I am a small time investor with only three properties. Over the years I've come to the conclusion that tax incentives is a good way to boost the return of your investments. But like you, I after looking at this tax incentive I concluded it did offer much to small guys like me.
For most, it should be looked at like a cherry on top if you are able to make it work... not a reason to force a deal.
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Mark Nickoson
Rental Property Investor · Dayton, OH · Member since 2015 · 79 posts · 85 votes
7y
@Matt Ward, Yep.
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