Opportunity Zones - Great Investing Trend?

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Opportunity Zones - Great Investing Trend?

PJ Kolnik
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."

http://www.housingfinance.com/news/treasury-names-...

https://www.curbed.com/2018/4/12/17227124/investme...

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Robb Crocker
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!

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  • Account Closed
    Specialist · San Mateo, CA · Member since 2009 · 42 posts · 10 votes
    8y

    @Colin Simon That's how I understand it. Otherwise, you must make improvements of an amount equal to purchase price within 30 months. 

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  • Colin Simon
    Investor · Boulder, CO · Member since 2017 · 62 posts · 32 votes
    8y

    @Account Closed Thanks.

    https://www.bdo.com/insights/tax/state-and-local-t...

    Now I'm curious if this set of rules mean you cannot house hack a new build and also qualify:

    A “qualified opportunity zone business” is a trade or business in which:

    • Substantially all of its tangible property, owned or leased, is qualified opportunity zone business property;
    • At least 50 percent of its total gross income is derived from the active conduct of its business;
    • A substantial portion of its intangible property is used in the active conduct of its business;
    • Less than five percent of the average of its aggregate unadjusted bases of the property is attributable to nonqualified financial property; and

    The way I read this, by house hacking inside of an O-Zone, you wouldn't satisfy the first bullet point, because part of it is a primary occupancy and not business property.

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  • Austin Hendrickson
    Investor · Minneapolis, MN · Member since 2016 · 139 posts · 143 votes
    8y

    @Colin Simon you are most likely correct. A "house-hack" would not rise to the level of a trade or business and thus would not qualify. There is a lot of controversy over what constitutes a business but a "house-hack" in my opinion would clearly not qualify.

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    8y

    Substantially Improved

    Real estate that has been previously used in an OZ can still qualify as QOZ business property as long is purchased after Dec. 31, 2017 by the OZ business and as long as the OZ business substantially improves the property. Real estate is substantially improved for OZ purposes if during any 30-month period following acquisition of such property there are additions to basis that exceed the adjusted basis as of the beginning of the 30-month period.

    That's the part that gets me. Improving the property by more than the original basis would seem to imply new contruction/re-development. Even a latge rehab would never qualify. If I am right, then this is strictly re-development...

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  • Austin Hendrickson
    Investor · Minneapolis, MN · Member since 2016 · 139 posts · 143 votes
    8y

    @Ben Leybovich depends on what your cut-off for the definition of "re-development" vs  a big renovation project. The government wants major upgrades or new construction within these zones as to the 100% of basis requirement.

    I know of a few clients that are planning on exercising the significant renovation part of the code by putting in a lot more than the purchase price.

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    8y
    Originally posted by @Austin Hendrickson:

    @Ben Leybovich depends on what your cut-off for the definition of "re-development" vs  a big renovation project. The government wants major upgrades or new construction within these zones as to the 100% of basis requirement.

    I know of a few clients that are planning on exercising the significant renovation part of the code by putting in a lot more than the purchase price.

     That basically answers my question. A very hard-core rehab in my world is $20,000/unit. Serious rehab is $13,000. Common is $7,500. The basis ranges from $60,000 to $100,000 per unit. Obviously, this doesn't compute.

    Seems like this is a buy Class D for $20,000 per door, and spend $30,000 per door to re-do everything. Good for the communities. Not possible for me...:(

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    8y
    Originally posted by @Ben Leybovich:
    Originally posted by @Austin Hendrickson:

    @Ben Leybovich depends on what your cut-off for the definition of "re-development" vs  a big renovation project. The government wants major upgrades or new construction within these zones as to the 100% of basis requirement.

    I know of a few clients that are planning on exercising the significant renovation part of the code by putting in a lot more than the purchase price.

     That basically answers my question. A very hard-core rehab in my world is $20,000/unit. Serious rehab is $13,000. Common is $7,500. The basis ranges from $60,000 to $100,000 per unit. Obviously, this doesn't compute.

    Seems like this is a buy Class D for $20,000 per door, and spend $30,000 per door to re-do everything. Good for the communities. Not possible for me...:(

    It doesn't sound like the government consulted with you before making the O Zone program;) 

    The : "The NC Opportunity Zones Program is designed to encourage job creation, economic activity, housing and other community investments throughout North Carolina."  The way I plan to approach this in NC is to buy some land at <$5K per unit and build townhouses. All 100 counties in NC have some land eligible for the O Zone program, including higher demand areas like Garner NC. 

    Is it strange to you that the government creates this kind of incentive at year 8+ of a real estate bull market and with persistent labor shortages in the construction business? Odd timing. 

    2Reply
  • Eric Jacobs
    Specialist · Fort Lauderdale, FL · Member since 2016 · 187 posts · 128 votes
    8y

    The OZ program is designed to bring capital to areas where it would not otherwise be.  It does not attract capital to the areas that would have been experiencing a bull market in RE.  It is a master stroke designed in part by (I can't remember his name) a tech visionary (Napster, Facebook etc..) and Senator Kaine.  The timing is perfect.  

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  • Account Closed
    Specialist · San Mateo, CA · Member since 2009 · 42 posts · 10 votes
    8y

    Sean Parker is one of the tech guys involved. 

    Here's a story on the origins: https://www.forbes.com/sites/forbesdigitalcovers/2...

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