Opportunity Zones Investing

33 Replies

I was not sure where to post this.  Is anyone investing in Opportunity Zones either directly or through a platform?  If so, what strategies are people working on, and if you are using a platform, which platform is looking like it is the most attractive?

@Scott Smith

You have the option of creating an qualified opportunity fund and investing in the qualified opportunity zones.
There are strict rules on where you can invest in and how much improvements you need to make to the investment property. Following the rules will allow you to exclude a portion or all of the gain after a certain period.

If you are not interested in taking the time to do the investments yourself and following all the rules - you can invest in with a syndicator whose fund is set up as a qualified opportunity fund. 

If you do it yourself - you are likely looking at a greater return but more work. 

From my limited research, it looks like the initial capital has to be from a capital gain and not from ordinary income/savings.  Can anyone confirm this? 

Yes the investments into Qualified Opportunity Funds is from Capital Gains...that is to take advantage of the capital gains tax deferment. Technically the structure of Qualified Opportunity Funds since they are privately help (either C-Corp, or partnership) can accept investment from non capital gains monies. 

SikariLuxe.com has funds set up already accepting investors.

@Scott Smith yes SikariLuxe.com has open opportunity funds available for capital gains rollovers. And Fundrise is not yet technically open to investors. They are only building their potential investor list. There are 2 open active funds in the marketspace. SikariLuxe.com funds and Virtura Partners Fund. 

@Matt Fore Yes it does have to be capital gain although there is some language that just references "gains" so we are waiting on additional guidance as to whether ordinary gains would qualify.

I think the reason capital gains need to be invested into the funds instead of straight cash is that by recognizing a capital gain you are selling something which promotes economic activity (selling stocks, businesses, real estate, etc.)

@Scott Smith I have yet to see that guidance. The way the opportunity zone tax code is worded now is that if the investment consists of a mix between capital gains and cash contributions then only the portion relating to capital gains will give rise to tax benefits (i.e. pro rata treatment, cash contributions would dilute the benefits)

If you have any support for the post tax cash investments being allowed let me know!

Here is the break down on gains. The answer is in the title of 1400z-2 Special rules for capital gains invested in opportunity zones. Now an investor can invest in an opportunity fund even if they don't have capital gains. They just don't get to claim the deferment for that tax year but they do get the benefit of the 10 year mark for the 1400z-2(c) Special Rules for investments held for at least 10 years. 

"In the case of any investment held by the tax payer for at least 10 years and with respect to which the taxpayer makes an election under this clause, the basis of such property shall be equal to the market value of such investment on the date that investment is sold or exchanged. " 

If anybody has questions specific to opportunity funds DM me. Have set up $2.5B in funds already, and have one of only 2 funds actually open to investors right now.

@David Sillaman so you are saying a 100% cash investment into a QOZ Fund that for example buys an apartment building and holds it for 10+ years would get the appreciation and depreciation tax free? If so this would be big!

Do you know where in the code it says that normal after tax investments are allowed? Everything I have seen so far refers to gains being invested into the funds.

@Austin Hendrickson ...yea If you read (c) For the special rules as of right now (keeping in mind that it may change in the future...)but it specifically states "any investment" held by the taxpayer. They will have to make and election at the 10 year mark under that clause but ….yea as it reads an investor can invest directly in an OZ Fund and that investment can be a cash investment not based on capital gains and get the special rule at 10 years. They don't get deferment initially...and the whole step up at 5 and 7 goes the window because it doesn't apply. However the FMV at 10 does. Which means they are locked for 10 years unless they are willing to pay the tax on the gain for cashing out early, but if held they get the gains tax free.

Ok I have absolute confirmation on the subject of the investments. I spoke with Steve Kennedy Opportunity Zone Leader for PWC. Yes an investor can put non gain money into an opportunity. However there will no tax benefit for doing so. The benefit to the investor comes in the form of the investment return rate. Possible OZ Fund Investment could be higher yielding than other outlets.

@David Sillaman Ok so it sounds like cash investments will not give rise to the appreciation/depreciation tax benefits for holding 10+ years and it must be capital gains invested into a fund to get that treatment.

If cash and capital gains are mixed into a fund I believe that dilutes the tax benefits. Did you ask Steve Kennedy on that?

Interesting thread, thanks for all of the color @David Sillaman

My question is about using leverage for these QOZ deals.  For example, I've read on another BP thread that if you buy a $100k property and use only $20k as a down-payment, and $80k in debt from either a private lender or bank, that you would then be required to invest only $20k to improve the property (not a full $100k as others have suggested).

Those are just basic number to get the gist across.  Is this type of leverage possible when doing QOZ deals within your own fund?

It certainly would make things easier.

Property shall be treated as substantially improved by the qualified opportunity fund only if, during any 30 month period beginning after the date of acquisition of such property, additions to the basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period of times in the hands of the qualified opportunity fund. 

Your basis is your all in price initially before improvements. So in your example as others have suggested is right. Because the basis of the property is $100k not the $20k from the fund. So you would have to improve the property by another $100k for the substantial improvement to kick in.

I've been heavily involved in the OZ program and think it'll help inject capital into the areas that need it most. You have to have capital gains that you are looking to avoid/defer paying in order to benefit from the program. So this really isn't a beneficial program for the normal REI. If, however, you have a portfolio or large multi-unit you are looking to sell then this would be a great program for you to get into.

Please DM me if you would like further details.