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Opportunity Zones

By: Max Sharkansky, Managing Partner
Opportunity Zones - feature image

Opportunity Zones, simply put, are low-income census tracts selected for this designation by state governors and certified by the U.S. Treasury Department.

They came about through a new community development program, established by Congress in the Tax Cuts and Job Act of 2017, to promote long-term investments in low-income urban and rural communities throughout the United States.

This year, state governors were required to select up to 25% of their state’s eligible low-income census tracts to become Opportunity Zones, which will remain the state’s designated areas for 10 years.

Now there are 8,700 Opportunity Zones throughout the United States – but why does that matter for investors?

The program allows shareholders selling a variety of assets – including stocks, art or a business – to reinvest their capital gains into Opportunity Zone funds.

Investors will soon be able to defer or even eliminate capital gains tax through this program by reinvesting property sale gains in an Opportunity Fund – a private sector investment vehicle that invests at least 90% of their capital in Opportunity Zones.

By simply investing their unrealized capital gains into an Opportunity Fund within 180 days of the original sale, the taxes owed on those gains is deferred until the selling of the interest in the Fund, or December 31, 2026 – whichever comes first.

Should the investor hold the investment for 5 years, they will defer the tax payment as well as earn a 10% step up in basis, providing capital gains taxes savings.

Holding the investment for 7 years defers the tax payment and earns the investor a 15% step up in basis.

The biggest advantage for investors comes from leaving their gains in the Opportunity Fund for 10 years, as investors will pay no capital gains tax on the Opportunity Fund investment, other than those which were previously deferred (and now offered at a lower rate).

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Holding an investment in an Opportunity Fund for at least 10 years provides a more resolute solution to avoiding gains taxes than a 1031 exchange. With a 1031 exchange, investors are still required to pay taxes once assets are sold.

Another benefit to investing in an Opportunity Fund rather than a 1031 exchange is the opportunity to benefit from basis step ups, should an investor choose to exit the fund prior to the 10 years, unlike a 1031 where the investor must pay a depreciation recapture if exiting the 1031 early.

As with all investments, there are risks to consider before reinvesting gains in an Opportunity Fund. As most of the investments within the fund will be vertical development, there will be leverage involved, which means that every development will have some form of financing.

Investors should review the levels of leverage and guarantees, and verify the Sponsor’s credibility.

Ultimately, investors would be wise to partner with a fund manager or syndicator with substantial market experience to really nail down what opportunities are right for their portfolio.

Max Sharkansky, Managing Partner
Posted By Max Sharkansky, Managing Partner

Max is co-founder of Trion Properties and oversees all aspects of acquisition, disposition, and property analysis for the company. Since founding Trion he has led the acquisition, renovation and disposition of over $300,000,000 in mismanaged and distressed assets, primarily in multi family, yielding an average IRR in excess of 30%.

Max's driving objectives in investing are to deliver outsized returns without taking outsized risks and the words he lives by are that "real estate doesn't kill people, debt does."