The Benefits of Opportunity Zones
In 2018, President Donald Trump rolled out a new Opportunity Zones program looking to help grow economic growth and development and create jobs in communities that need the economic boost. As a result of the new program, real estate investors have started to use the new tax incentive program to their advantage and are using it to invest in commercial real estate, particularly multifamily properties.
The Opportunity Zone program allows investors to defer and reduce their tax liability to be reinvesting their gains in a new form of investment called an Opportunity Fund. The fund is a partnership or a corporation that is planning to invest the majority of their holdings into one or multiple predetermined Opportunity Zones across the country. Opportunity Funds can only be invested in the construction of new buildings or through substantial improvements to an existing property, which is why property development is growing the most from this incentive.
Investors looking to take advantage of the new tax incentive and use it for multifamily projects need to consider the length of the project, market fundamentals, and the complexity of the Opportunity Zone investment. They should treat the tax advantage as a bonus and not the reason behind their decision to invest in a new project.
Investors who follow the rules of the Opportunity Zone program put in place by the government can receive significant capital gain tax incentives for both short term and long term investments. When investors reinvest a capital gain into an Opportunity Fund, they can then defer and reduce their tax liability on the investment gain. They potentially can qualify to receive tax-free treatment for any future appreciation earned through the fund with these tax incentives boosting their after-tax return.
Anyone who invests realized capital gains into qualified Opportunity Funds can defer their capital gains taxes for their earnings until April 2027 for any investments held through December 31, 2026. The gains must be invested in an Opportunity Fund within 180 days to qualify for any of the tax incentives offered to investors.
The Opportunity Zones program offers substantial opportunities to help lift economically distressed communities across the United States through a market-based approach. Investors have the chance to transform thousands of neighborhoods by accessing numerous capital gains tax incentives as long as they are within the guidelines of the Opportunity Zone program.