Opportunity Zones and Real Estate Funds - How it Works and Deadlines

 I would like to premise this with a few things. First, I have done a dynamic financial model for opportunity zone feasibility analysis for a private client. It is too specific to sell in my opinion so I never built a template for it. Second, just because a property is in an opportunity zone doesn't mean it is a great investment. There are many strategies surrounding this kind of real estate investing methodology and it is for the experienced.

Opportunity zones are a type of economic development program in the United States that was created by the Tax Cuts and Jobs Act of 2017. The program provides tax incentives for investors to invest in designated low-income communities in an effort to stimulate economic development and job creation in those areas.

Here's how it works:

  • The government designates certain low-income areas as opportunity zones. These zones are chosen by state governors and are typically located in areas that are economically distressed and in need of investment.
  • Investors who have capital gains (profits made from the sale of assets such as stocks or real estate) can choose to reinvest those gains into an opportunity zone fund.
  • The opportunity zone fund then uses the capital to make investments in businesses or real estate projects located within an opportunity zone.
  • Investors who participate in the program can receive a variety of tax benefits, including:
    • A temporary deferral of capital gains taxes on the profits that were reinvested into the opportunity zone fund
    • A reduction in capital gains taxes on those profits if they are held in the fund for at least 5 years
    • A complete exclusion of capital gains taxes on profits earned from the opportunity zone investment if the investment is held for at least 10 years

Opportunity zone funds can be a good way for investors to potentially earn a return on their investment while also supporting economic development in low-income areas. However, it's important to carefully consider the risks and potential rewards of any investment, including opportunity zone funds.

Here is more detail on the three main tax benefits of investing in opportunity zones:

  • Deferral of capital gains taxes: Investors who reinvest their capital gains into an opportunity zone fund can defer paying taxes on those profits until the earlier of the sale of the opportunity zone investment or December 31, 2026.
  • Reduction of capital gains taxes: If an investor holds their opportunity zone investment for at least 5 years, they can receive a 10% reduction in the capital gains taxes that are due on the reinvested profits. If the investment is held for at least 7 years, the reduction increases to 15%.
  • Exclusion of capital gains taxes: If an investor holds their opportunity zone investment for at least 10 years, they can potentially exclude all capital gains taxes on the profits earned from the investment.

It's important to note that these tax benefits are only available to investors who reinvest their capital gains into an opportunity zone fund and hold the investment for the required length of time. Investors should also be aware that opportunity zone investments carry inherent risks and may not always result in a profitable return.

When Will the Opportunity Zone Program End?

This is a bit confusing, but from all related research, it looks like you have to buy the property prior to December 31, 2026 and it is possible this may be extended a few years. In this case, you may not get much deferral, but you still are eligible for the 5,7, and 10 year capital gains tax benefits.

As with any federal law, the opportunity zone program could potentially be amended or terminated by Congress at some point in the future.

However, the program is currently scheduled to end on December 31, 2047, unless it is extended by Congress. This means that opportunity zone investments made before that date will be eligible for the tax benefits provided by the program. That date is when you must sell any properties by in order to get the benefits listed above.

It's worth noting that the opportunity zone program has faced some criticism and controversy since it was implemented, and it's possible that Congress could decide to make changes to the program or even end it before the scheduled expiration date. However, it's difficult to predict exactly what will happen with the program in the future.

Important Dates for Opportunity Zone Funds / Investors:

  • December 22, 2017: The Tax Cuts and Jobs Act of 2017 was signed into law, establishing the opportunity zone program.
  • April 9, 2018: The Internal Revenue Service (IRS) released the first set of proposed regulations for the opportunity zone program.
  • June 14, 2018: The IRS released a list of designated opportunity zones in each state.
  • October 19, 2018: The IRS released the final regulations for the opportunity zone program.
  • November 2018: The first opportunity zone fund was launched.
  • April 17, 2019: The IRS released guidance on how to calculate the amount of gains that must be invested in an opportunity zone fund.
  • December 20, 2019: The deadline for investing in an opportunity zone fund and still being able to claim the full tax benefits of the program. Note, there are still other tax benefits if investing after this date, but before the end of 2026.
  • It's worth noting that the opportunity zone program is set to expire on December 31, 2026. This may be extended by two years.

You may be interested in this multifamily deal analyzer template.