It’s no secret that one of the most impactful additions to recent Tax Code has been the creation of a specific investment incentive program under the 2017 Tax Cuts and Jobs Act. This program, which focuses on certain low-income communities known as Opportunity Zones, is designed to help spur economic development and growth in otherwise distressed areas by enabling savvy real estate investors to delay taxation on capital gains until December 31, 2026 – but only when they invest the gains into one of these Qualified Opportunity Zones. What’s more, this particular program has additional tax breaks built in for real estate investments that are held for 5, 7, and 10 years.
In order to take full advantage of the program, investors who are seeking to defer their capital gains tax by investing in an opportunity zone should do so by the end of 2019. As such, we’re predicting that 2019 will be the year of opportunity… opportunity zones, that is. Read on to learn more about 3 trends you should watch in opportunity zones in 2019.
Demand driver markets
By their very definition, the 800+ opportunity zones in the US are geographical areas in need of economic development. Even though there are significant tax benefits available, a project still needs to be pragmatic, measured by traditional metrics of investment, including being located near sustainable demand drivers, such as hospitals, universities, government centers and other stable institutions and established or emerging job generators. Smart investors are studying opportunity zone maps to see how these zones include, or are at least adjacent to, the demand drivers.
Even with the lack of solid historical databases on opportunity zone investments, there are some trends that we’ve already begun to see, especially regarding the types of projects that are currently underway.
One of the biggest uncertainties currently surrounding the low number of opportunity zone implementations involves opportunity zone funds holding multiple properties all within the same fund. As a result, this creates some uncertainty in terms of hold period timing for each individual asset within the fund – and current regulations, unfortunately, don’t provide much clarification. When combined with other aspects that still remain uncertain, such as how cash-out refinancing will be handled, you can expect to see new and simplified guidelines that contain details on how to handle these uncertain issues, and more.
A focus on state and local policy
When it comes to investing in opportunity zones, it is a good idea to cross-reference sources of information. While the IRS is actively working on tax interpretation and regulations framework, it is equally important to focus on state and local level jurisdictions that are involved in private sector investment.
It is also important to monitor local conditions and tailor your investment plan accordingly, as there may be additional local incentives that can be layered on top of opportunity zone advantages.
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