Why Engage in Opportunity Zone Projects?
Projects located in opportunity zones provide tax advantages to investors that significantly enhance the overall return for investors.
- Gains. Investors in opportunity zone real estate projects invest only their gains in opportunity zone projects and retain their initial investment that generated the gain (i.e., their basis).
- Deferral. Investors defer the payment of any tax obligations arising from the sale of a capital asset until 2026.
- Safe Harbor. Investors that invest capital gains in a qualified opportunity fund by December 31, 2019 and keep the investment in the qualified opportunity fund until December 31, 2026 pay capital gains tax on 85% of their initial capital contribution to the qualified opportunity fund (i.e., the gains from the sale of a capital asset). Investors that invest capital gains in a qualified opportunity fund by December 31, 2021 and keep the investment in the qualified opportunity fund until December 31, 2026 pay capital gains tax on 90% of their initial capital contribution to the qualified opportunity fund.
- Basis Step Up. Investors maintaining their investment in a qualified opportunity fund for 10 years and 1 day pay no capital gains on the sale of their interest in the qualified opportunity fund (e.g., if a $100,000 investment in a qualified opportunity fund is sold for $300,000.00 the investor will have a $200,000 gain that is not subject to capital gains tax).
- Diversification. Investors may invest any capital gains, including gains from the sale of stocks, bonds, and the sale of businesses.
The benefits to investors dovetail with the benefits to developers.
- Lower Annual Returns. Developers can pay a lower annual or preferred return and still offer an attractive investment due to the after-tax return to investors in qualified opportunity zones. If the sale of an interest in a qualified opportunity fund in a significant gain realized by the investor, the investor is able to capture all of the upside without losing any to tax payments.
- Long-Term Investors. Developers will have investors that need to stay invested in projects for a longer period of time. This can allow developers more time to realize the full benefit of a project and reduce the need to generate returns quickly.
- Non-Exclusive. Developers can use a qualified opportunity fund in conjunction with traditional equity structures. This allows the developer to use the qualified opportunity fund as a component to the capital stack. It can also allow a developer to increase returns to traditional investors while still providing an attractive gain for the investors in the qualified opportunity fund.
View the full The National Law Review article HERE.
Learn more about Opportunity Zones and explore Sixty West Funds targeted properties HERE.