Why Engage in Opportunity Zone Projects?
Projects located in opportunity zones provide tax advantages to investors that significantly enhance the overall return for investors.
- Gains. Investors in opportunity zone real estate projects invest only their gains in opportunity zone projects and retain their initial investment that generated the gain (i.e., their basis).
- Deferral. Investors defer the payment of any tax obligations arising from the sale of a capital asset until 2026.
- Safe Harbor. Investors that invest capital gains in a qualified opportunity fund by December 31, 2019 and keep the investment in the qualified opportunity fund until December 31, 2026 pay capital gains tax on 85% of their initial capital contribution to the qualified opportunity fund (i.e., the gains from the sale of a capital asset). Investors that invest capital gains in a qualified opportunity fund by December 31, 2021 and keep the investment in the qualified opportunity fund until December 31, 2026 pay capital gains tax on 90% of their initial capital contribution to the qualified opportunity fund.
- Basis Step Up. Investors maintaining their investment in a qualified opportunity fund for 10 years and 1 day pay no capital gains on the sale of their interest in the qualified opportunity fund (e.g., if a $100,000 investment in a qualified opportunity fund is sold for $300,000.00 the investor will have a $200,000 gain that is not subject to capital gains tax).
- Diversification. Investors may invest any capital gains, including gains from the sale of stocks, bonds, and the sale of businesses.
The benefits to investors dovetail with the benefits to developers.
- Lower Annual Returns. Developers can pay a lower annual or preferred return and still offer an attractive investment due to the after-tax return to investors in qualified opportunity zones. If the sale of an interest in a qualified opportunity fund in a significant gain realized by the investor, the investor is able to capture all of the upside without losing any to tax payments.
- Long-Term Investors. Developers will have investors that need to stay invested in projects for a longer period of time. This can allow developers more time to realize the full benefit of a project and reduce the need to generate returns quickly.
- Non-Exclusive. Developers can use a qualified opportunity fund in conjunction with traditional equity structures. This allows the developer to use the qualified opportunity fund as a component to the capital stack. It can also allow a developer to increase returns to traditional investors while still providing an attractive gain for the investors in the qualified opportunity fund.
View the full The National Law Review article HERE.