Opportunity zones are taking the real estate world by storm. As part of the Tax Cuts and Jobs Act of 2017 passed by Congress and signed by the President in December 2017, the Opportunity Zone legislation creates compelling tax incentives to invest in designated low-income areas of the country to create real estate development and job growth. The driving forces behind the Opportunity Zone legislation was an unlikely group of philanthropist consisting of Sean Parker of Napster and Facebook fame and former junk bond king Michael Milken, along with a bi-partisan group in Congress lead by Senator Tim Scott of South Carolina.
Under the legislation, the U.S. Treasury Department has designated roughly 9,000 opportunity zones across the country of which 126 are located here in Colorado. The areas designated must have a poverty rate no less than 20 percent in a census tract, a median income less than 80 percent of the surrounding area with median family income 37 percent below the state median and unemployment 1.6 times higher than the national average. Each state got to select up to 25 percent of eligible census tracts within their state as designated opportunity zones. Of the 126 designated opportunity zones in Colorado, there are 37 located in the Denver area, with the remaining 89 located in other parts of Colorado with a significant number located on the Western Slope in areas that are already seeing significant growth.
The tax advantages for investing in opportunity zones are significant. An investor who has capital gains from the sale of an existing investment has the opportunity to defer and eliminate a portion or those gains by reinvesting those gains through Qualified Opportunity Zone Funds into both real estate and non-real estate investments located in opportunity zones. If an investor leaves their capital gain in the opportunity zone investment for at least five years, only 90 percent of the original gain is taxed as a capital gain; and if the gain is invested for seven years, only 85% of the original gain is taxed. But the most significant tax break is the opportunity that comes if the investor holds the investment for 10 years or more. After 10 years, new capital gains that accumulate from the original investment are forgiven so long as the investment is liquidated within 30 years.
To take advantage of these tax breaks, an investor must make an election to invest their realized short or long-term capital gains into an Opportunity Zone or qualified Opportunity Zone Fund within 180 days of realizing the capital gain they wish to defer. An Opportunity Zone Fund must meet a number of requirements established by the IRS, one of which is holding 90% of its assets in Opportunity Zone real estate businesses. Any Opportunity Zone real estate assets must be purchased by the end of 2019, and substantial improvements made to those properties within 30 months of acquisition.
Many believe that this Opportunity Zone legislation will revolutionize investing in lower income areas by offering one of the greatest tax breaks in American history. It’s estimated that up to $1.0 trillion of capital could flow into opportunity zones nationwide over the next three years. In a state like Colorado that has already experienced record growth and investment, investing in Colorado’s opportunity zones could be one of the best real estate opportunities available. Large sections of western Colorado in areas like Glenwood Springs, Grand Junction, Delta and Montrose, to name a few, are in opportunity zones. Investors who understand this new Opportunity Zone legislation and how to put it to use could not only see very favorable capital gains tax treatment, but also see strong investment gains from investing in these promising emerging markets.
William Small, CCIM is the Founder and CEO of Zenith Realty Advisors, LLC, a commercial-investment real estate advisory and investment firm. If you’re interested in contacting him, you can reach him at (970) 925-3866 or by email at William.Small@ZenithInvestment.com