The 2017 Tax Cuts and Jobs Act was the most wide-reaching tax overhaul in years. Most headlines centered around the slashing of the corporate tax rate from 35% to 21%, and S&P 500 companies felt the profit boost immediately – posting double-digit growth in 2018.
But for investors who researched deeper into the provisions of the Tax Cuts and Jobs Act, it became clear that Real Estate was also an asset class with new, favorable tax treatments.
One particular provision in the law—a bipartisan collaboration called the Investing in Opportunity Act—generated few initial headlines but drew the attention of experienced real estate investors. The provision, called the Opportunity Zone (OZ) Program, incentivizes long-term investment in communities of economic need through Qualified Opportunity Zone Funds (QOF). Opportunity zones have the potential not only to help revitalize communities in need, but also to offer preferential tax treatments to investors with a desire to pursue (tax advantaged) returns while also making a positive social impact.
Let’s Start with the Basics: What is an Opportunity Zone?
The IRS defines an opportunity zone as a census tract designated to be “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.”
Once selected by state governors, opportunity zones can receive private capital investments through Qualified Opportunity Funds. These investment vehicles – whether created as corporations or partnerships – invest capital gains from prior investments in the state-designated Qualified Opportunity Zones of their choosing. In exchange, investors have the unique ability to defer and reduce capital gains tax payments until April 2027 for any investment held through December 31, 2026.
The concept evolved out of a 2015 paper from the Economic Innovation Group (EIG), a “bipartisan public policy organization that combines innovative research and data-driven advocacy to address America’s most pressing economic challenges.” The paper, called “Unlocking Private Capital to Facilitate Growth,” argues that private sector investment is a critical tool for revitalizing distressed economic areas in the United States, which continue to struggle in the aftermath of the Great Recession. Doing so, says its authors, will ultimately spur job creation and economic opportunity in areas of need.
How Can Investors Participate Directly in Opportunity Zones?
The 2017 Tax Cuts and Jobs Act created substantial incentive for investors to commit capital to opportunity zones. Under the new law, investors can harvest capital gains from existing investments, whether stocks, real estate, or another source, with those gains becoming eligible for preferential tax treatment if invested in a Qualified Opportunity Fund within 180 days from the time of gain recognition.
Once invested, tax on prior gains is deferrable until the earlier of two dates: when an investor sells, or exchanges, the QOF investment; or December 31, 2026. The deferment structure is tiered into 5-year, 7-year, and 10-year periods, with benefits becoming increasingly more attractive the longer the length of the investment:
Traditional Real Estate Investment
Real Estate Opportunities Zones Investment