A bipartisan federal regulation created by the Tax Cuts and Jobs Act of 2017, Opportunity Zones enable investors to defer, reduce and eliminate capital gain taxes while making long-term investments. Investors can only invest capital gains in Opportunity Zone funds.
Investors have 180 days after realizing capital gains to invest some or all of their gains in an Opportunity Zone fund. Short or long-term capital gains, including gains from stock or real estate, can be invested. Capital gains through a partnership have a longer time horizon to invest.
Defer taxes on the original capital gains invested in an OZ fund until the end of 2026. Investing tax deferred dollars increases the power of investor capital.
If the capital gains are invested by 2021, the deferred taxes owed in 2026 are reduced by 10%.
After 10 years of being invested, all new capital gains made within the opportunity zone investment can be realized tax free. That’s 100% forgiveness of taxes for gains made in the OZ, resulting in a large boost to returns.
When viewing the map, make sure to zoom in to see all of the Opportunity Zones. For instance, it's hard to see that downtown Glenwood Springs is in the zone, while Main Street in Grand Junction is not. We detailed a number of these key zones in our recent Colorado Opportunity Zones Map article.
For trusted third party Opportunity Zone FAQs, go to the source. The IRS Opportunity Zone FAQ Page includes the most comprehensive and up to date FAQs. We have also compiled a few FAQs of our own.
The Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, which was championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), who led a regionally and politically diverse coalition of nearly 100 congressional cosponsors. Once the new tax code was passed, it was left up to each state to determine which areas would become Opportunity Zones. In the state of Colorado, our very own Stephanie Copeland was responsible for designating the Opportunity Zones. Before becoming a partner at Four Points, she headed economic development for Governor Hickenlooper where she was tasked with designating the zones.
While our fund is exclusively focused on real estate backed assets that can clearly endure the 10 year hold to maximize the OZ benefits, Opportunity Zones also offer significant potential benefits to business investments. Most direct business investments seeking OZ benefits are single investments (not multi-asset funds) and are entered with the understanding that a 10 year hold might be in the best interest of the company or the investor.
Qualified Opportunity Zone funds need to certify that 90% of their capital is placed in a qualified investment every December 31st and June 30th. Treasury eased compliance by allowing funds to exclude capital raised in the previous 180 days for this test. In other words, if Four Points accepted investor capital on July 15th in 2019, 90% of the capital would need to be invested in a qualified investment by June 30th, 2020. This test still represents a timing challenge for funds. Right-sizing the raise to match real deals is a large driver of our decision to lock down deals first and then raising the appropriate amount of capital to match.
Some communities, especially in urban areas, will experience more rapid gentrification. Also, communities which were not chosen as Opportunity Zones will have an even harder time raising capital. While these concerns are real, Four Points is a firm believer that this bill will, on the whole, provide incredible benefit to the communities we are investing in. Our geographical focus is on "emerging" communities in Colorado (not Denver or any community on the Front Range) that need more workforce housing and hospitality to create independent local economies. Through the OZ program, Four Points can bring critical infrastructure, services and jobs to emerging communities.
Doubling your basis essentially means doubling your investment, which primarily applies to rehabilitating existing OZ property. Treasury has specified that investors need to double the value of the structure on the property, or in other words double the basis. So, if a property is purchased with land value of $300,000 and structure value of $400,000, then at least another $400,000 must be invested to improve the structures. Investors have 30 months to double their basis on the structure value. The intent is to prevent land banking, where people just park money in real estate to avoid taxes.