By Ari Rastegar CEO, Rastegar Property, for Accounting Today
Opportunity zones are the hottest trend in the world of commercial real estate. Neighborhoods from New York City to the Bay Area are seeing substantial investment capital because of this program, but like any opportunity, there are pitfalls. While there are many ways to hit a home run with OZ investments, there are also plenty of ways to strikeout. Let's take some time to go over what you need to know about opportunity zones, capital gains and how to protect your clients’ investments in this arena.
What are opportunity zones?
As an accounting or tax professional, I’m going to assume you're familiar with the broad strokes relating to opportunity zones, but if not, here is a quick primer:
Congress's 2017 Tax Cuts and Jobs Act introduced several changes in how the federal government approaches real estate taxation. One provision of the bill, the Investing in Opportunity Act, created qualified opportunity zones and opportunity funds. These "opportunity zones" were created to help revitalize struggling communities through the use of private capital, rather than direct investment by the federal government. Investors who choose to invest in opportunity zones may benefit from capital gains tax incentives exclusive to this bill, including the ability to defer paying capital gains tax for any OZ-related earnings until April 2027, as long as those investments are held through the end of 2026.
Avoiding OZ pitfalls
Predictably, opportunity zones have grabbed the attention of investors across the country. Many have rushed to deploy capital in designated OZs with little regard to the underlying fundamentals behind their investment, which is a mistake. While tax deferral and the ability to leverage that capital are enticing, investors need to take steps to ensure their investments make sense and that they are not investing only to meet tax criteria.
The best way to avoid this pitfall is to research the foundation of an opportunity zone before investing. It is critical to research the region's economic growth, population growth, employment metrics and all of the other variables that one would traditionally examine before entering a market. Investing in an OZ without regard to the facts on the ground is putting the cart before the horse and can lead to substantial losses or reduced returns over the long term.
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