A tax incentive that could build communities
A hallmark of the Tax Cuts and Jobs Act passed in 2017 was the creation of Opportunity Zones. In short, the program was another effort to encourage investment in economically depressed communities around the country. And true to the current state of politics in the country, both cheerleaders and critics were quick to voice their opinions.
In 2018, Florida joined the list of states eager to participate in the program. The candidate neighborhoods, identified as census tracts, represent counties throughout the state but South Florida leads the pack in the number of communities in need of investment. Nevertheless, nearly two years after its passage, Opportunity Zones (OZ) remain a highly debated topic.
How Opportunity Zones work
The basis of the program is to promote economic investment while offering a tax break incentive. In short, when taxpayers sell an appreciated asset, they can then invest that gain in governor-nominated census tracts. Some key details:
- If the amount of the gain is invested in a qualifying opportunity zone within 180 days, the gain is not included in the investor’s income until the investment is sold or when the program comes to an end on December 31, 2026.
- If the OZ investment is held for at least five years, the taxpayer will receive a 10% discount on the capital gains tax. If held for at least seven years, that discount increases to 15%. Because of the December 31, 2026 deadline, taxpayers must invest no later than December 31, 2021, to receive the 10% discount, and no later than December 31, 2019, to receive the 15% discount.
- In addition, if the taxpayer holds onto the Opportunity Zone investment for 10 years, there will be no taxes on the sale of the new investment.
Pros and cons of Opportunity Zones
Naturally, there are pluses and minuses – philosophical and economic – to investing in Opportunity Zones. For investors, it’s a tax incentive that also holds the potential to do good: reduce poverty, increase employment, and spur growth in some of the poorest communities in the nation. In fact, of the top 10 cities predicted to benefit the most from the Opportunity Zones program, five are in Florida: Orlando (1), West Palm Beach (2), Tampa (3), Fort Lauderdale (8), and Miami (10).
Critics, on the other hand, say, “not so fast.” Some point to previous programs that they say failed in the long run, as well as the number of people who would be displaced as a result of living in an Opportunity Zone and the convergence of investments in neighborhoods that were already seeing a surge in investments prior to the start of the new law.
Investors need to pay attention
Even in the midst of the debate, though, opportunities are there – but for the investor, the best advice is to proceed with caution, for some very good reasons:
- The purpose of the Opportunity Zone program was to encourage investment in very poor communities. As a result, investments may carry more risk than if one were to invest in a more solid, established neighborhood. If the investment results in a loss for the taxpayer investor, that loss may erase the initial benefit of the hoped-for tax break.
- Opportunity Zone investments are managed through “Qualified” Opportunity Funds (QOF), which are partnerships that can be formed and managed by anyone. In other words, “qualified” doesn’t necessarily indicate that the QOF and its investments are under the umbrella of any regulatory agency. The onus is on the investor to do the vetting.
- It’s also important to keep the program’s end date in sight. On December 31, 2026, the taxman will come knocking to collect the capital gains tax, regardless of if the investment has sold. Again, the onus is on the taxpayer/investor to have the funds to pay that tax.
Opportunities in South Florida
Morris Southeast Group is excited about the possibilities found in Opportunity Zones throughout the region – especially when one of these investments is researched thoroughly and represents the right move for one of our clients. To learn more about property investment opportunities, and/or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: build communities, How Opportunity Zones work, investors, Opportunity Zones and CRE, Pros and cons of Opportunity Zones, tax incentive, The Potential and Pitfalls
