The term “opportunity zone” has catapulted into the real estate spotlight since the 2017 Tax Cuts and Jobs Act passed on December 22, 2017.
Formally known as the Qualified Opportunity Zone program, it’s an established effort to encourage development in economically challenged communities by providing tax incentives for long-term, private investors.
According to the Internal Revenue Service (IRS), “an Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.”
The state must nominate localities to qualify as an opportunity zone. As of June 14, 2018, all U.S. states and territories have identified opportunity zones.
What Are the Tax Benefits of Investing in an Opportunity Zone?
There are three main U.S. tax benefits of investing in Qualified Opportunity Funds (QOF):
Investors can temporarily defer taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized by the day the opportunity investment is disposed or by Dec 31, 2026 — whichever comes first.
Investors also benefit from capital gains reinvested in an Opportunity Fund on a step-up basis. If they hold their Opportunity Fund investment for five years, the basis increases by 10 percent. If it’s held for seven years, it increases by an additional five percent. Taxpayers can exclude up to 15 percent of the original gain from taxation.
After holding the property for at least ten years, investors receive a permanent exclusion from taxable income of capital gains from the sale or exchange of the investment. The exclusion is limited to gains accrued after an investment is in an opportunity zone.
Taxpayers must invest in a QOF within 180 days, elect deferral on Form 8949 and file with its tax return. The investment in the QOF must be an equity interest, not a debt interest to qualify.
How Opportunity Zones Are Affecting Businesses
The new program is driving real estate investors and businesses to previously avoided areas.
The 2007 recession caused businesses nationwide to collapse. It primarily affected small family and entrepreneur-owned businesses, and recovery has been slow. The goal of implementing tax benefits for opportunity zones is to drive economic growth in struggling communities.
Opportunity Zones in Orange County
Orange County is a highly sought-after area for real estate investors. But finding a financially liable opportunity is challenging — cap rates are low, competition is high and inventory is limited.
As of December 2018, there are twenty-seven opportunity zones in Orange County, including downtown Santa Ana. This unique opportunity provides investors with a rare chance to invest in the Orange County market with exclusive tax advantages.
If you own an investment property in an identified Opportunity Zone or are an investor looking to acquire a property in an Opportunity Zone, contact us today to learn how you can benefit from this new program.
Or, check out our recent Orange County Opportunity Zone listings.