The Opportunity Zones incentive was created by the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The initiative operates to encourage economic growth by providing tax benefits to investors thus giving them incentive to re-invest their unrealized capital gains into dedicated Qualified Opportunity Funds (QOF). First, investors can defer tax on any prior gains invested in a QOF until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. A QOF is an investment vehicle set up as a corporation or a partnership for the purposes of investing in an eligible property located in an Opportunity Zone. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If the investment is held for more than 7 years, there is a 15% exclusion. Furthermore, if the investor retains the investment in the Opportunity Fund for at least 10 years, the investor is eligible for an increase in the basis of the QOF investment equal to its fair market value on the date that the QOF is sold or exchanged. Significantly, one does not have to reside, work or own a business in the Opportunity Zone to qualify for this tax advantage. To qualify, one must only invest in a recognized gain in a QOF and elect to defer on that gain.
Opportunity zones include a wide array of real estate sectors, including multifamily and/or affordable housing, industrial developments and mixed-use developments, which include hospitality and/or retail. Eligible investments are restricted to new developments and capitalintensive renovations, including property repurposing or rehabilitations, ground-up developments, business headquarter expansions and public/private partnerships.
At the present time, there are 8,700 tracts designated as Opportunity Zones, including 427 tracts in Florida, 68 in Miami-Dade and the entirety of Puerto Rico. Florida is in an especially favorable position to benefit from Opportunity Zone investment. In particular, Orlando, West Palm Beach, Tampa, Fort Lauderdale and Miami all appear to be ready to take advantage of this unique investment opportunity. These are all areas where growing populations support strong economic and real estate fundamentals. When combined with the lack of state income taxes in Florida, the dynamics in these markets create an extremely favorable environment for development and investment.
Investors in Florida should retain qualified legal counsel to ensure they are compliant with the rules and regulations and that they receive the full tax benefits. When determining whether or not to invest in an Opportunity Zone, timing is essential. Investors should seek out projects that already have regulatory approval in place. This will not only make the process proceed more expeditiously but will also minimize regulatory risk. Finally, investors should be aware that while all Opportunity Zones are located in economically distressed areas, not all “distress” is the same. In making their decisions, investors should look for areas with strong job, income and population growth and commercial real estate growth.