Chicago, IL · Member since 2017 · 81 posts · 87 votes
Investors,
I was reading about these new Opportunity Zones that are being established as part of the Tax Cut and Jobs Acts. I wanted to start a thread that starts the speculation of potential investment opporunity possible in these areas.
Also, can someone help me understand the benefit of the following statement in these zones?
"Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on any prior gains until no later than Dec. 31, 2026, so long as the gain is reinvested in a qualified Opportunity Fund, an investment vehicle organized to make investments in these areas. In addition, if the investor holds the investment in the Opportunity Fund for at least 10 years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold, according to Treasury officials."
Developer · Wilsonville, OR · Member since 2017 · 2 posts · 4 votes
8y
I've been doing a TON of research on this. I think two of them most important items to keep in mind are:
1. From everything I've read, and from the "experts" I've talked with, you can only invest CAPITAL GAINS from other investments to get the tax benefits of the Opportunity Zone investment. You can't invest "earned income" or "borrowed money." It has to be money that you recieved as a result of a capital gain from the sale of an asset like stocks, real estate, art, etc... (Not sure, but it seems like crypto currency gains might qualify too.)
2. If you are purchasing an existing piece of property, you must invest as much in the rehab/upgrade of the property as you did to initially acquire it. For instance, if you buy a $100,000 rental and put down $30K to buy it (and use $70K of bank financing), you must spend at least $30K in improvements. To earlier comments on this thread....the IRS still has to determine what will and won't qualify as "expenses" on the improvements....but it's safe to assume most of the expenses you would normally pay for on a standard rehab would qualify.
From my perspective, this program is MOST beneficial to folks who have large capital gains in assets OTHER than real estate .....as RE investors like us can currently use the 1031 exchange to defer taxes for decades....while still securing access to capital through the leverage and financing of those assets.
That said, if you are willing to pay a REDUCED capital gains bill by selling some of your real estate, you could potentially have a MASSIVE, tax-free capital gain at the end of 10 years, if you are able to invest in the right asset in the next "up and coming" area.
My focus is small commercial buildings. This program lines up perfectly with what I've already been doing for the past 13 years...which is buying under-utilized property in areas of future progress. I've told some of my friends and business associates that for those who understand how to utilize this program, it can literally be a LIFE CHANGING opportunity to build personal and family wealth. We've got 7.5 years to take advantage of it....which sounds like a lot of time....but will be here and gone a lot quicker than most of us probably realize.
I look forward to hearing more about what the BP community does to take advantage!
Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
8y
Ah, I heard about this. You can revitalize a city with investment, and not pay taxes on the income from the process until later. I was under the impression this was for multi-million dollar investments to breath life into forgotten cities. Perhaps there's neighborhoods that qualify, however!
Hopefully some more folks comment on this thread, it will be interesting to see if anyone has plans to utilize this new tax code...
Investor · White Haven PA · Member since 2014 · 362 posts · 221 votes
8y
I'm also interested in this.. About 15 states have already indentifed their zones and the other states are due to submit by the extended deadline of April 20th. You can see the areas on the IRS website that have been submitted.
Rental Property Investor · Denver, CO · Member since 2018 · 10 posts · 10 votes
8y
@PJ Kolnik, @ray slack, @Dan baker, @jason james
has anyone been able to dig up more info on this? I've been keeping an eye on it since Feb/March and it sounds like the next step is for the IRS to release specific language and guidance on how to form Oppty Funds, which is slated from sometime in "the summer or 2018". Below are the resources i've been following, but if anyone knows of other good resources, please share!
@Dan Baker, dm me about setting something up here in Denver, if you're interested.
I am currently in escrow on a small project that will qualify. I also already own another project that will qualify. Both are fairly small but I know I'll learn a lot doing them so I'll keep you all posted in the forums.
Austin, TX · Member since 2016 · 70 posts · 42 votes
8y
As of now, we understand that the IRS is allowing self-certification of Qualified Opportunity Funds. To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018), and attaches that form to the taxpayer’s federal income tax return for the taxable year. Consequently, no approval or action by the IRS is required to certify a taxpayer. The IRS also says it will provide more details and additional legal guidance over the next few months.
Chicago, IL · Member since 2017 · 81 posts · 87 votes
8y
@Drew Reynolds thanks for the follow up on this paperwork. I'm surprised that they are letting investors self-certify this type of tax break. I wish there was a bit more oversight and guidelines to keep people from abusing the opportunity out of the gate.
Austin, TX · Member since 2016 · 70 posts · 42 votes
8y
Thanks @PJ Kolnik. The thought behind the self-certification is to eliminate "red tape". Since the program has a relatively short window (until the 12/31/26 date with taxes due), Congress wants to eliminate administrative backlog to approving investment/projects. However, keep in mind that on-going certification is also required for these funds. The funds will be required to report twice a year and are required to invest at least 90% of capital into qualified projects in qualified zones. Failure to do so will result in penalties and possible de-certification for continued violation (and potentially big tax problems for investors). Also, we're hearing that interests in QOZ funds may be classified as securities, which adds a certain barrier and oversight to it. The short of it is that small, one-off projects with "friends-and-family" investors will be able to organize quickly with minimal administrative burden. The successful larger funds are likely to be more buttoned-up (full blown securities offerings, tax opinions, structured fund governance, etc.). Note however, as has been repeated numerous times here - the QOZ concept is still not finalized - we are awaiting clarification from Congress on several points and all this could change. To be continued....
Real Estate Agent · Mount Nebo, WV · Member since 2017 · 174 posts · 68 votes
8y
After reviewing the QOZ documentation here, I think this is going to be an incredible opportunity for me. Just so happens that my target area for rentals is in one of the zones near me!
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
Of course, that all could change when more information is released. I would love to see this stimulate out-of-state money into my area in West Virginia - the state of WV has some incredible opportunity, and this may help some folks actually take advantage of that opportunity.
The IRA could potentially be converted to a self-directed IRA that would then be capable of investing in real estate. Mind you, this would be an investment wholly by and for the benefit of the IRA, not a means for you to access the funds for your own purposes. A self-directed IRA is simply a diversification tool.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
8y
@Account Closed
Right now I'm renovating a fourplex that will qualify, I will do 100% improvements within an opportunity zone. Hold for 10 years. I'm under contract to buy and 18 unit in the same neighborhood, same plan!
Investor · New York, NY · Member since 2016 · 105 posts · 118 votes
8y
We're currently going through the process of setting up an opportunity fund to close on a few commercial properties that we already had under contract. Our capital raising strategy did need to change since our investors can only use capital gains from other investments to roll into the fund: "under § 1400Z-2(a)(1) of the Internal Revenue Code, you may elect to defer the tax on some or all of that gain...".
Have the opportunity zone tax incentives helped you in any way so far? I would think they could help attract equity partners looking to invest capital gains.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
8y
@Account Closed
I agree, that was my thought. I have not yet raised capital but would like to do so in this one little are of an opportunity zone in Kansas City that has a ton of potential.
Developer · Wilsonville, OR · Member since 2017 · 2 posts · 4 votes
8y
I've been doing a TON of research on this. I think two of them most important items to keep in mind are:
1. From everything I've read, and from the "experts" I've talked with, you can only invest CAPITAL GAINS from other investments to get the tax benefits of the Opportunity Zone investment. You can't invest "earned income" or "borrowed money." It has to be money that you recieved as a result of a capital gain from the sale of an asset like stocks, real estate, art, etc... (Not sure, but it seems like crypto currency gains might qualify too.)
2. If you are purchasing an existing piece of property, you must invest as much in the rehab/upgrade of the property as you did to initially acquire it. For instance, if you buy a $100,000 rental and put down $30K to buy it (and use $70K of bank financing), you must spend at least $30K in improvements. To earlier comments on this thread....the IRS still has to determine what will and won't qualify as "expenses" on the improvements....but it's safe to assume most of the expenses you would normally pay for on a standard rehab would qualify.
From my perspective, this program is MOST beneficial to folks who have large capital gains in assets OTHER than real estate .....as RE investors like us can currently use the 1031 exchange to defer taxes for decades....while still securing access to capital through the leverage and financing of those assets.
That said, if you are willing to pay a REDUCED capital gains bill by selling some of your real estate, you could potentially have a MASSIVE, tax-free capital gain at the end of 10 years, if you are able to invest in the right asset in the next "up and coming" area.
My focus is small commercial buildings. This program lines up perfectly with what I've already been doing for the past 13 years...which is buying under-utilized property in areas of future progress. I've told some of my friends and business associates that for those who understand how to utilize this program, it can literally be a LIFE CHANGING opportunity to build personal and family wealth. We've got 7.5 years to take advantage of it....which sounds like a lot of time....but will be here and gone a lot quicker than most of us probably realize.
I look forward to hearing more about what the BP community does to take advantage!
Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
8y
I'm just catching up with this. I never thought the opportunity zones would be so widespread in Philadelphia. Represents a huge opportunity for tax savings probably even going back and amending a bunch of 2017 tax returns.
Specialist · San Mateo, CA · Member since 2009 · 42 posts · 10 votes
8y
@Robb Crocker Good points. I've spent some time reading about both points and wanted to comment on each.
1. You're right that only capital gains are eligible for the tax benefits. They also must be invested into a fund within 180 days. Funds can consist of both capital gains and other non-tax advantaged money.
2. Based on my reading, existing real estate structures must be improved by an amount equal to the purchase price, not the down payment, within 30 months. Here's a copy of the "substantial improvement" text:
That is much tougher in places with existing buildings that need some upgrades, but not anything close to 100% of purchase price. There's some discussion of amending this requirement in this recent blog post.
Chicago, IL · Member since 2017 · 81 posts · 87 votes
8y
@Account Closed in regards to that amount equal to purchase price, you must really need to find a piece of property that is in pretty rough shape that it would need a rehab equal to its purchase price. Tough to find something that fits that criteria that will cash flow adequately in this market.
Specialist · San Mateo, CA · Member since 2009 · 42 posts · 10 votes
8y
@PJ Kolnik Anywhere with expensive land is going to be tough to rehab and make work with the proposed requiremts. There is discussion of changing the rehab investment requirement for that reason. No final word yet as far as I know.
Specialist · Virginia Beach · Member since 2018 · 42 posts · 9 votes
8y
Most initial funds is smart will issue zone stock and follow SEC 506 Reg D rules on private corporate offerings. This gives the early investors the benefit of the tax deferment and SEC guidance. There is still much to be clarified with Zone Partnerships and especially with qualified zone property. As an investor I would be looking for the Private Placement Memo, Risks, FWD Looking Statements, etc. Plus you have SEC to fall back to.
There is still additional guidance that will be coming based zone partnerships (LLC's) and qualified zone business property. In addition, with zone stock your risk in the investment which is spread out over multiple assets ideally. And I would be looking for pooled assets not single asset funds.
For the tax gurus here, let's say I have a tax loss carryforward of $X and sell appreciated stock today generating $X in capital gains. My understanding is that normally I'd have to use up the tax loss carryforward upon the sale of the appreciated securities. But if I invest in an O-Zone fund, would I still need to use up the carryforward? Or could I defer gains on the sale due to the investment in the O-Zone fund and continue to keep my tax loss carryforward?