Collaboration across party lines is a remarkable sight in politics. An example is the Tax Cuts and Jobs Act of 2017 (TCJA), where a bipartisan effort led by Cory Booker (D-NJ) and Tim Scott (R-SC) resulted in the creation of Opportunity Zones. The Opportunity Zones initiative introduced a significant real estate incentive aimed at encouraging affluent investors to revitalize and redevelop underprivileged areas across the nation.

Over 8,700 municipal areas across the US have been designated as Opportunity Zones, covering 11% of the total US census and nearly 23% of them exist in rural areas. Investors in these zones can defer tax on capital gains until April 2027. When it was introduced in 2017 it provided a highly attractive deferral. Investors could benefit from a 15%, 10%, or 5% step-up in the asset's cost basis, reducing the taxable gain to be paid in 2027, depending on the timing of the Opportunity Zone investment. However, these advantages are phasing out. The tax deferral feature will end for investments made in 2026 and beyond, and the 5% step-up of the asset's cost basis was already phased out in 2019.

Certain advantages persist until June 28, 2027, starting from the introduction to the present. The first advantage is the elimination of long term capital gains tax liability if held for 10 or more years. For instance, an investor who commits $1 million to an Opportunity Zone and withdraws $2 million after a decade would not be taxed on the profit. Furthermore, Opportunity Zone investments come with all real estate tax benefits, including depreciation.

While the allure of Opportunity Zones may have dulled somewhat, the appeal endures. The increase in cost basis from the initial asset sale that funded the investment is no longer in play, and the deferral period is dwindling, diminishing the benefits. Nonetheless, the remaining advantages are robust. Notably, as Section 1031 exchanges are now limited to real estate assets under the TCJA, this stands as one of the scant options for investors to postpone capital gains from non-real estate assets today.

As of this writing, the Opportunity Zone program will be eliminated for any investment after June 28, 2027. Until then, it is absolutely worth considering this asset program as an investment solution for high net worth individuals and families. Two unique advantages include the ability to offset taxable income from asset depreciation and the exemption from taxes on long-term capital gains after a mandated 10-year ownership period.

Using the example above, the investor gets completely free use of the capital once the Opportunity Zone is liquidated and will not ever have to pay taxes on its gain. With a traditional real estate property (outside of the Opportunity Zone program), you can only defer the tax liability on its capital gain if you like-kind exchange the full proceeds into another investment property. Additionally, unlike deferring the tax liability of a stock position by way of a Section 721 exchange allows you to diversify into a basket of equity positions, but you cannot depreciate the asset like you can with real estate.  

Bear in mind that investing in Opportunity Zone properties carries inherent risks. Venturing into low-income areas may not guarantee consistent returns, particularly if the financial well-being of the local residents does not show signs of improvement. Furthermore, these investments often involve initial development or renovation projects, which come with their own set of risks, as predicting performance is more straightforward with established properties.

For investors who do not wish to manage their own Opportunity Zone project, but may find the concept appropriate for their best interest, there exists a robust platform of private equity firms that offer passive investments into Qualified Opportunity Zone funds. Schedule a call with David Gottlieb using the information below to discuss how Opportunity Zones may benefit you.  

Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation.  Information was obtained from sources believed to be reliable but was not verified for accuracy. All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”). Savvy Advisors is not a real estate broker and does not provide real estate services.

Securities offered through DAI Securities, LLC, member FINRA/SIPC. Advisory services offered through Savvy Advisors, Inc an SEC registered investment adviser. DAI Securities, LLC and Savvy Advisors, Inc are separate, and unaffiliated, entities.