If you’ve been paying attention, you’ve likely heard about Qualified Opportunity Zones. A result of the Investing in Opportunity Act that was tucked into the larger tax reform bill of 2017, O-Zones consist of more than 8,500 state-designated areas that meet federal provisions for real estate investment that can yield significant tax benefits for investors. Touted as transformational by their proponents, Opportunity Zones are being described in such seemingly hyperbolic terms as real estate nirvana1, and the legislation that spawned them is being considered a “once in a generation” occurrence.
Skeptics beware. Much like the play Hamilton managed to live up to its hype, O-Zones may indeed be what they seem: a positive and bipartisan approach to the revitalization of depressed areas that is an unparalleled combination of good ideas, deeds and ROI. Could this single act become the New Deal of our generation? Here’s what you’ll want to understand:
A Bit of Background
Billionaire investor, philanthropist and former President of Facebook Sean Parker is one of the drivers behind O-Zones. His think tank, the Economic Innovation Group, crafted the policy and helped champion it with legislators. After his tenure at Facebook, Parker has spent much of his time and considerable wealth taking on entrenched problems that affect millions of people across the planet in areas of life sciences, global public health, and civic engagement. It’s the last of these focuses that brought him to study the causes and potential solutions of economic inequity. Parker and his Economic Innovation Group set out to tackle the problem of blighted neighborhoods and communities across the country by pinpointing strategic changes to tax policy. With a firm understanding of the windfall of good investments and the negative impact of capital gains, Parker proposed a query: “How do we get investors to put money into places where they wouldn’t normally invest?”2
According to Parker, “people were sitting on large capital gains with low basis and huge appreciation. There was all this money sitting on the sidelines.” He understood that “the incentive needs to be powerful enough that it can unlock large amounts of capital, aggregate that capital into funds and force the funds to invest in distressed areas…Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed.”2
In a nod to Parker’s partnership with the Congress, New Jersey Democratic Senator Cory Booker agrees. “If we can get the trillions of dollars of capital off the sidelines and get the best investment minds coming into our communities…we can end up creating jobs and opportunity.”2
Enter Opportunity Zones
Designated by state governors and approved by the Treasury Department and IRS, Opportunity Zones are some 8,700 tracts across the U.S. considered to be “distressed communities.” They must meet a host of criteria including having a poverty rate of 20% or higher and a median household income that is less than 80% of its surrounding area. However, governors can designate up to 25 percent of their eligible tracts as O-zones. And unlike previous attempts at investment zoning, such as Enterprise Zones and New Market Tax credits, O-zones have less restrictions and caps, and incredible potential for investors to reap reward without having to pay taxes on their earnings.
Unheard of Tax Incentives
Now for the hype that isn’t hype at all. By some accounts, there is more than 6 trillion dollars of paper profits on American balance sheets that are ripe for investment. But shifting those monies often means first paying huge capital gains taxes. Investors, therefore, have little incentive to sell off and reinvest. But what if you could take your profits and immediately invest them in real estate in serious need of an uplift, while deferring taxes owed on capital gains? Furthermore, what if, in so doing, you pushed off those taxes for seven years and even then received a reduction of your gains tax liability of 15 percent? Better still, if you chose wisely and the O-zone fund in which you invested performed well, the return on your investment would grow tax-free as long as you held on to it for a minimum of ten years. That means your investment earnings would not be subject to capital gains taxes at all.
Opportunity Zones are still new and evolving. However, Shorewood Real Estate Group has been at the forefront of this unique investment opportunity. We already offer approved Opportunity Zone Funds and recently closed on our first Opportunity Zone in Jamaica, Queens. The project will be developed into a 320,000 square foot mixed-use property consisting of 300 rental apartments, retail space and parking. If you’d like to learn more about this project or about Shorewood’s Opportunity Zone Fund platform, please contact us today. This opportunity sounds too good to be true, but only if you pass it by.
S. Lawrence Davis
President & CEO
Shorewood Real Estate Group LLC