Blog #Opportunity zones

A new survey released points potential trouble for Proposition 15.  An opinion survey by Probolosky Research shows 48.8% plan to vote against it, 41% for it and 10.3% are undecided.

Although this is goods news, there is still a lot of time between now and election day and a lot can change.  Couple with that, Biden’s overtures that he might eliminate the tax deferred 1031 exchange, Commercial Real Estate Property owners still have a lot at stake this election.

One option to Commercial Property, Industrial and Warehouse owners who occupy their building is a sale-leaseback.  A sale-leaseback not only allows the owner to enjoy an infusion of cash, but rental payments under the lease are usually fully tax deductible.

Aside from a 1031 exchange, another option to Commercial and Industrial Real Estate owners is deferring a capital gain to an opportunity zone fund.  To learn more, see this post: Opportunity Zones: A Commercial Real Estate Capital Gains Tax Savings Instrument

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A recent report from CoStar indicated that the latest data shows momentum building for Opportunity Zones.  Last year sale prices jumped for most property types located in the federally designated areas.  The average price paid data suggests biggest beneficiaries are multifamily and hotel properties which is opposite of prevailing overall market trends.  Additionally, fundraising continues to climb, data suggests $1.6 billion has been raised in the first 6 weeks of 2020 compared to $1.5 billion for the 4^th quarter in 2019.

Opportunity zones offer a great chance to save on taxes but also requires a restricted holding period of five, seven or 10 years.  If the money remains invested for five years investors get a 10 percent break on the “rolled in” gains and after seven years that tax break rises to 15 percent.  On top of that the gains you make over your initial investment are tax free after a decade.  So, after 10 years if a property you invested $2 million in is worth $5 million, then you have $3 million-dollar tax free gain.

To invest in an opportunity zone property, you must first form an opportunity zone fund.  You must also roll the proceeds from the sale of your asset with gains within 180 days to qualify.  There are existing funds you can invest in or you can form your own.

What makes this different from a 1031 exchange is you can use proceeds to defer capital gains from different instruments like stock gains or business sales.  Also, to qualify the taxpayer must “substantially improve” the property over a 30-month period.  This article touches on a few of the major points but does not go in depth on the opportunity zone program. A good broker can refer you to someone who can walk you through process and take a deeper dive into this evolving and complex program.