As real estate developers and investors, we are presented with opportunities to explore and utilize incentive programs, tax credits and investment tools which can make otherwise unviable projects a realistic option. Often, the hardest part of taking advantage of these programs is staying informed of new programs as they become available. Recently, a new tool was added to our arsenal, Qualified Opportunity Zones, designed to spur economic development in distressed communities . The following explanation comes from our long-time legal counsel and partner, Polsinelli, and explains the parameters, uses and benefits of this new program.
New Federal Program Provides Tremendous Opportunity, Tax Benefits for Real Estate Investors
Last December, Congress passed a major tax reform bill that, among many other changes, created a new program called “Opportunity Zones” to promote long-term investments in low-income areas by providing the opportunity for taxpayers to re-invest capital gains and defer and/or reduce capital gains taxes. Although we are still awaiting official guidance from Treasury and IRS on the program, early signs point to Opportunity Zones being one of the most important tax changes of the last few decades for investors and businesses. Polsinelli is part of a coalition helping to develop the administrative rules and guidance regarding these investments, and we believe strongly in the future of Opportunity Zone investing. Below is the information you need to know about this program and how it can affect real estate investment for years to come.
What, When, Where, Why, and How: Understanding Opportunity Zones
What Are Opportunity Zones? Opportunity Zones are disadvantaged areas in each state that are designated for special treatment under the new Tax Act. Investors get significant tax advantages for investing in real estate and businesses in the Opportunity Zone, with the goal of the Tax Act being to incentivize economic development in the disadvantaged areas and help create jobs there.
Where Are The Opportunity Zones? All states have designated their Opportunity Zones, and a map of the Opportunity Zones is available here. Many Opportunity Zones are located in major metropolitan areas across the United States, including the Kansas City area.
Who Should Care About Opportunity Zones? In short, everyone who pays taxes. Under the new program, individuals and companies making long-term real estate and business investments in Opportunity Zones can earn capital gains on those investments and never pay taxes on that money. In addition, investors with existing taxable gains from the sale of real estate or another business can reinvest the gains in an Opportunity Zone, never pay taxes on 15% of the existing gain, and defer the remaining 85% of the gain until 2026. Importantly, there is no cap on the amount of tax savings that can be achieved through Opportunity Zones.