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A Practical Guide to Opportunity Zone Investing
Written by:
Crowd Street Editorial Team
Reviewed by:
Anna-Marie Allander Lieb
(Opportunity Zones) were created under the Tax Cuts and Jobs Act of 2017 to encourage long-term investment in low-income urban and rural communities across the United States. The intent was to support existing businesses, help new ones form, and finance real estate projects in communities still recovering from the Great Recession.^1,2^
Today, more than 8,700 Opportunity Zones exist across the U.S. and its territories. ^3^ They can represent opportunities for real estate investors, but they also present a unique set of considerations and risks.
This article offers a high-level overview of (Opportunity Zone investing) — including some standard practices for evaluating and eventually exiting these assets.
What Should Investors Know About Opportunity Zones?
Not all Opportunity Zones look the same. Among the roughly 8,700 designated areas, many are located in rural regions, while others sit within the core of major metropolitan markets.^4^
Investors generally have 180 days from the date a capital gain is recognized to invest that gain into a Qualified Opportunity Fund (QOF) in order to defer federal taxes.^5^
To maximize (Opportunity Zone tax benefits), investors may want to contribute eligible capital gains only. While it is usually permissible to invest non-capital-gain dollars into a QOF (subject to sponsor approval), the tax benefits typically apply only to the portion funded with eligible capital gains. If an investor contributes a combination of eligible and non-eligible gains — a mixed-funds investment — the investor should notify the sponsor and pay close attention to the subscription agreement, in addition to consulting financial, tax, and legal advisors.^6^
As with any commercial real estate investment, investors should evaluate the underlying strategy of the QOF. The tax rules governing Opportunity Zones are complex and can vary based on the details of the offering and an investor’s personal tax situation. Professional tax and legal advice is strongly recommended.
Opportunity Zone investments are typically long-term. While the deferral of capital gains tax can be appealing, the potential permanent exclusion of eligible gains on appreciation — after meeting the long-term hold requirements — may account for a larger portion of the potential tax benefit.^5^
Why Do Investors Consider Opportunity Zones?
Some investors view Opportunity Zones as one of the more meaningful tax-planning tools available. Early Economic Innovation Group (EIG) estimates suggested more than $6 trillion in unrealized capital gains across the country. ^7^ Opportunity Zones present a means of directing some of that capital into potentially tax-advantaged projects.
Eligible gains may come from several sources — including stocks, the sale of a business, real estate dispositions, or qualified Section 1231 gains. Under the Tax Cuts and Jobs Act, investors can defer recognized capital gains for up to six years by investing them in a QOF.
Deferral, however, may be considered part of the benefit. If an investment is held in a QOF for at least ten years, any capital gains generated through appreciation can be completely excluded.^5^ For real estate development held within a QOF, this can potentially translate into an after-tax return. Returns are however never guaranteed.
Additionally, any QOF investment held for at least five years by the time the deferred gain becomes taxable — no later than December 31, 2026 — is eligible for a ten percent step-up in basis.5 This reduces the taxable portion of the original deferred gain to 90 percent.
As with any investment, investors should evaluate Opportunity Zone offerings based on the strength of the business plan and the associated tax benefits (in consultation with tax and legal advisors). Tax considerations for Opportunity Zone investments are complex and can vary significantly based on individual circumstances. Neither Crowd Street nor its affiliates provide tax or legal advice. Investors should consult qualified professionals to understand how Opportunity Zone rules apply to their specific situation.
