Opportunity zones are one of the biggest changes to the tax code vis-a-vis commercial real estate since the codification of the 1031 tax-deferred exchange or President Reagan's complete overhaul of the accelerated depreciation system in the mid-80's tax reform. An opportunity zone is, quite simply, a location where your business can invest in real estate and, potentially, other equity, and potentially avoid paying capital gains.

 

The 2017 Tax Cuts and Jobs Act created opportunity zones. It allowed states to certify lower-income census tracts as opportunity zones. According to the IRS, states have acted. As of this writing in late 2019, you can find opportunity zones in 50 states, the District of Columbia and in five different US territories.  Lower-income doesn't mean undesirable, either. All of the following neighborhoods are designated as opportunity zones as of the writing of this article:

 

  • West Oakland, CA -- located right across the Bay Bridge from San Francisco.

  • (Parts of) Downtown San Jose, CA -- already home to Adobe headquarters and home to a planned Google campus.

  • Downtown Los Angeles, CA and the adjacent LA Arts District.

  • The "Pearl District" in Portland, OR

  • Downtown Houston, TX

  • Parts of Astoria (Queens), Brooklyn Heights and Williamsburg

 

Many cities across America have areas that are either rapidly developing or in the path of development that are designated as opportunity zones. This allows companies and investors to be in the right places with tax benefits. It also means that the benefits of that future growth can potentially happen on a tax-free basis. With 8,764 opportunity zones to choose from (according to The Opportunity Zone Database), it's likely that one could fit your business or expansion needs.

 

Taking advantage of an opportunity zone isn't a simple process, and the law sets out a series of rules and requirements. If you follow the rules and hold your opportunity zone investment for at least ten years, you will have the opportunity to collect your capital gains on the investment on a completely tax-free basis. In plain English, if you buy or build a building for $15 million and sell it for $30 million 11 years later, you will owe nothing in capital gains taxes. Furthermore, you can defer capital gains taxes on the money that you put into the opportunity zone investment and you can potentially get a tax cut on those gains when you realize them, as well.

 

While the benefits of investing in an opportunity zone can be huge, the IRS has multiple rules that you will have to follow, as well.

 

  1. To get the tax benefits, you have to use existing capital gains to fund the investment.

  2. You have to set up a special company called an "opportunity fund" to hold the investments.

  3. You have to actually invest in improving a piece of property in an opportunity zone. Constructing a new building or gutting and renovating one should work, but simply occupying an existing one might not.

  4. You have to do business in that opportunity zone -- a meaningful amount of business.

 

For all of these reasons, taking advantage of the opportunity zone designation might not be a fit for every business. However, you might want to choose to occupy one even so. Because so many of them are in great locations and are attracting lots of development, the next great building could end up in one!

 

Here are a few other articles we know you'll enjoy:

What to Know About Rent Escalation Clauses

What is a Tenant Improvement Allowance?

What is Rent Abatement & What You Should Know

 

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