FAQ Time: Everything You Ever Wanted to Know About Opportunity Zones in 7 Simple Answers

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World Executives Digest | FAQ Time: Everything You Ever Wanted to Know About Opportunity Zones in 7 Simple Answers | Real estate investors who favor commercial properties and are worth their salt are always on the lookout for a quality buy. Fortunately, there seems to always be lots of opportunities out there, whether they be office, medical, retail, multi-family, industrial, or many others. Opportunity zones are among one of the newest that hold such high promise.

October 2018 saw the Federal government release a highly-anticipated guidance called an Opportunity Zone, which allows real estate investors interested in commercial properties and developers to better understand what these are and how they can find a qualified opportunity zone fund. What follows are seven simple answers pertaining to these areas.

What is an Opportunity Zone?

An opportunity zone is a distressed community where real estate investors are qualified for preferential tax treatment or tax deferrals. The first set of areas selected to be opportunity zones were designated as such on April 9, 2018. These differ from New Markets Tax Credits, which is a program with real estate investors that has been in operation since the early 2000s.  There is no cap on opportunity zones tax subsidy, but they do carry with them a 25 percent limit on the census tracts that can be targeted.

How Does an Area Qualify for Opportunity Zone Status?

To earn an opportunity zone designation, an area is nominated by the state’s governor (the mayor in the case of Washington DC). Not more than 25 percent of all qualified census tracts may be nominated. These areas must have a poverty rate of 20 percent or greater and a median family income of 80 percent or greater.

Why Are Opportunity Zones Created?

Opportunity Zones are identified by the Economic Innovation Group, a not-for-profit organization formed to build relationships between distressed communities and commercial real estate investors.

What is the Net Result of Opportunity Zones?

The goal of opportunity zones is to benefit existing businesses, help to begin businesses, and provide financing for real estate development projects in distressed areas impacted by economic disadvantages.

What Incentives Do Opportunity Zones Provide to Those Who Invest?

Those who invest long-term in opportunity zones gain the benefit of taxes deferred on prior gains. For example, if an investment is held for 10 years or longer, an investor can increase the basis of their investment to the fair market value when it is exchanged or sold.

After Making an Opportunity Zone Investment, Holding it 10 Years, and Selling or Exchanging It, Can The Basis be Adjusted on Interest to its Fair Market Value?

Yes, but only as far as the extent to which you made proper deferral elections to your investment.

How Can an Investor Find Opportunity Zones?

Opportunity zones are chosen from low-income census areas and those surrounding them. Tax breaks are nominated by the governor of the state where they are located and certified by the IRS.

The Community Development Financial Institutions Fund offers a list of designated communities as well as a rich collection of other materials related to opportunity zone investments that are available to interested parties.

Opportunity Zones carry with them the ability for real estate investors to help the economic development of areas where the need is dire. Fortunately, by providing these funds, real estate investors as well as those who live in low-income areas, can benefit from these investments.