Opportunity Zones: What They Mean For the Multifamily Investor
The passage of the Tax Cuts and Jobs Act (TCJA) in late 2017 drew attention for its sweeping cuts to corporate tax rates and doubling of the individual standard deduction. But one initially-overlooked part of the TCJA—the Investing in Opportunity Act (IOA) has stolen the spotlight in many real estate circles.
What is the IOA?
The IOA created what it calls “Opportunity Zones,” or census tracts, in economically distressed areas. As a way to stimulate real estate growth and private investment in these traditionally underserved areas, the IOA allows anyone who invests in an Opportunity Zone property to benefit from unique capital gains tax incentives only available through this program. For many investors, a specific property's placement in an Opportunity Zone can transform it from a good investment to a great one. It can even spur an investment in an area that would otherwise have never seen one.
Opportunity Zones throughout the U.S.
There are Opportunity Zones available in every state, from Long Beach, California to Cumberland County, Maine. In fact, there are approximately 8,700 Opportunity Zones nationwide, many of which are in areas ripe for real estate investment. As a result, many funds have been launched to capitalize on the unique opportunity these Opportunity Zones provide—CIM Group, which has nearly $30 billion in assets, recently announced a $5 billion Opportunity Fund specifically targeting Opportunity Zone investments. Starwood Capital Group has plans to invest $500 million into a fund targeting Opportunity Zones, and is joined by a number of other industry heavyweights establishing similar funds, including Skybridge Capital and RXR Realty. This movement of capital has led analysts from Cushman & Wakefield to forecast that investment in Opportunity Zones could surpass $100 billion over the next several years.
Multifamily Investment in Opportunity Zones
Opportunity Zone investing is especially well-suited to multifamily investors, many of whom are already focused on creative ways to cut investment costs. To invest in the program, a taxpayer has 180 days to invest the realized capital gain from the sale of an asset into a Qualified Opportunity Zone Fund, which is an investment vehicle that holds 90% of its assets in qualified Opportunity Zone property. However, if the asset is already located in a QOZ, that reinvestment time frame jumps to 1-year. If the investment is held in the Opportunity Zone, the capital gains tax on the original investment will be reduced by 10% in 5 years, 15% in 7 years, and completely eliminated after 10 years. It is important to note that investors must substantially improve their investments in Opportunity Zones—to qualify for the program, they must bring in one dollar of improvements for every one dollar of real estate they acquire in an Opportunity Zone by the end of a 30 month window. Fortunately, a key exception exists: if the property was vacant immediately prior to being purchased by an opportunity fund, the substantial improvement provision is not applicable.
The US Treasury and IRS recently clarified many of the regulative details surrounding the IOA, providing investor’s certainty that their prospective investment will qualify for all Opportunity Zone benefits. Therefore, it’s a wise move for investors – particularly those in the multifamily market – to familiarize themselves with the IOA so they can be well-positioned to capitalize on the available tax benefits.