An investor who has triggered a capital gain by selling an asset like stocks or real estate can receive special tax benefits if they roll that gain into an Opportunity Fund within 180 days. There are three primary advantages to rolling over a capital gain into an Opportunity fund:
Defer payment of your capital gains until Dec 31, 2026.
Decrease the taxed amount you owe by up to 15% after 7 years.
Pay 0% tax on gains earned from the Opportunity Fund.
There are three types of investments that can fall under Opportunity Fund investments in the Opportunity Zone program:
Partnership interests in businesses that operate in a qualified Opportunity Zone.
Stock ownership in businesses that conduct most or all of their operations within a qualified Opportunity Zone.
Property such as factory equipment or real estate located within a qualified Opportunity Zone.
The concept of a tax credit versus the Opportunity Zone incentive and what implications does that distinction have…
I hear often people describe Opportunity Zone program as a tax credit, which it is not. And it’s significantly different than a tax credit. A historic tax credit or a brownfield tax credit is an incentive to engage in a project that actually changes the economics of the real estate transaction. It can make a project that would not otherwise be profitable, a profitable one. Whereas the Opportunity Zone program is designed to minimize the tax that an investor pays on a project when it is profitable.
So the key implication there is that first step is you must be able to identify an opportunity that generates a profit. And if you don’t generate the profit, the consequence, the opportunity to benefit for the investor is really still not zero, depending upon the outlook and investor profile (double-bottom line). In fact, there’s a bit of a cushion that you might be able to lose a little bit of money and still be okay in terms of getting your principal back, but it’s not like tax credits that really changed the basic economics. So that really begins to help us understand how to differentiate these 8,700-plus Opportunity Zones around the country and decide which ones are the most interesting as investment opportunities.
Some typical “what if” OZ scenarios and probabilities:
The land itself is appreciating rapidly.
We are having net migration to the area. Without an opinion, but factually, developing OZ’s tend to coincide with gentrification. There are social issues but investor upsides.
We could have a watershed event in terms of property values – goes hand in hand with prior point.
Exit strategy (kicker – conceptually they want to see 10% of net profit under circumstances “like” at 5 years a preliminary exit date): obliged or voluntarily seek global refinancing having met the 2% per year and a calculation that includes selling 1 or all (getting net tax P/L is what they get 10% of) – or by an appraisal of fair market by a third party
Based on our financing model (separately versus aggregate), it’s easy to sell one property even in a series of duplexes on one site, for example.