Qualified Opportunity Zones

[Adam Treece]

Has anyone taken advantage of a Qualified Opportunity Zone investment?

See link for more info - https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions#designated

The essence is that you can invest capital gains into a qualifying fund and defer capital gains, even completely diminishing the taxes if you leave the funds invested for a specified period.

If anyone has taken advantage of this, how did you go about it? Also how has it turned out so far? Any advice you would give to someone looking to go this route?

Thanks.

Adam

[Scott McIntosh]

@Adam Treece I'm a real estate investor and an attorney specializing in Opportunity Zone investments.  My partner and I created our own OZ fund in April and have been reinvesting capital gains from recent sales of our non-OZ holdings into our Qualified Opportunity Fund.  We've been focused on purchasing value-add single family and small multi-family in our local Opportunity Zones in Central Kentucky -- the deal economics on our OZ purchases thus far are looking great (in many cases, they're properties that would have been worth buying even without OZ benefits).  We're generally using hard money financing as a supplement to our OZ equity for the upfront purchase/substantial improvement, and then putting long-term financing in place once renovations are complete.  

My favorite part of the OZ upside in this space is the tax-free upside after a ten-year hold.  Based on the language in the statute, we'll get a "step-up in basis to fair market value" when we sell our interest in the Opportunity Fund -- so no tax, including depreciation recapture, upon sale in 10+ years.  Since we have to sell our "interest in the fund" to get that full benefit, we'll need to execute a portfolio sale (rather than selling each home as a single asset) when we decide to exit.  That'll enable us to take depreciation-sheltered income from the homes over the next ten+ years (including quite a bit of bonus-depreciation in the year renovations are completed) which we'll never have to recapture. 

I agree with @Kory Reynolds about the loss of control risks that come with LP investment in larger funds.  But if you're an active real estate investor able/willing to reinvest your own gains in OZ properties, then the incentives can add major value to what you're already doing.