There has been a lot of talk about opportunity zones over the last twelve months. But in the world of industrial real estate, what is an opportunity zone?
An Opportunity Zone
A qualified opportunity zone is an economic development tool designed to increase economic development and create new jobs in economically-distressed communities. It provides tax benefits to investors by allowing them to temporarily defer tax on their gains until the earlier of the investment being sold or exchanged or until December 31, 2026.
How much gains tax can I defer? If the opportunity zone investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. If an investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the Opportunity Fund investment equal to its fair market value on the date that the QOF investment is sold or exchanged. (irs.gov).
Who determines if a property is in an opportunity zone? Opportunity zones were nominated by the governor of each state following the guidelines of Tax Cuts and Jobs Act and certified by the Secretary of the U.S. Treasury.
Who do opportunity zones benefit? Opportunity zones benefit more than just the investor who is deferring his gains. Opportunity zones will also benefit engineers, architects and developers who will make the required substantial improvements to the building and benefit communities as these improved properties offer the opportunity for new businesses, new affordable housing and new living wage jobs.
Why were Opportunity Zones created?
There are a few reasons. More than half of the most economically distressed communities and neighborhoods in the United States had fewer jobs and fewer businesses in 2015 than they did in 2000. New business formation in these communities is nearing a record low, and this tool creates the opportunity for diversity. Currently, there are five major metropolitan areas in the United States that have as many businesses as the rest of the country combined.
Once a property has been acquired, is the investor responsible for improving the property? Yes. Once a property has been acquired within an opportunity zone, it must be “substantially improved.” This requires that improvements to the property must be made within 30 months of acquisition and that the improvements must be exceed the purchase price of the property. The goal of this program is for investors to drive private capital into distressed properties through deferred capital gains.
Are there use restrictions on the improved properties in an opportunity zone? Yes, properties may not be a golf course, massage parlor, hot tub facility, suntain facility, racetrack or gambling facility, or a retail liquor store. While not prohibited, there have been suggestions that the use is not one that would not be beneficial to a low-income community, such as a payday loan facility.
More questions? For assistance locating an industrial property in an opportunity zone here in northern Nevada, contact Beki Dobson and the industrial real estate professionals at Miller Industrial Properties now.
Miller Industrial is not a tax professional, and we recommend speaking to your financial advisor before considering an investments property.