Hornstein Fetter May 2019 Market Insight

The Hornstein Fetter Opportunity Zone Primer, Part 1:

There are over six trillion dollars in unrealized capital gains out there. Our real estate investors are responsible for some of that, but so are investors in stocks, bonds, mutual funds, and any number of other investment vehicles available today. That’s a lot of money, and seeing those gains realized is of particular interest to Uncle Sam. Rather than force those gains to realization (thus committing political suicide), the government cobbled together the Opportunity Zone Program to encourage investors to direct those gains into blighted areas of the country. It’s a great idea… for some. For others…. not so much.

In a very generic nut shell, Opportunity Zones offer some intriguing benefits right off the bat:

1. A return, tax free, of the investor’s initial basis.

2. A potential 10% reduction of current (non-OZ) capital gains assuming investors of the qualifying OZ asset have achieved 5 years of ownership by the year 2023.

3. An additional 5% reduction of current (non-OZ) capital gains assuming investors of the qualifying OZ asset have achieved 7 years of ownership by the year 2025.

4. A total forgiveness of all capital gains of the Opportunity Zone investment (but not the remaining 85% of the original capital gains) ten years from now.

It’s easy to see why investors are intrigued. For those who decide to pursue these incentives, here, again, is a very generic summary of what is needed to qualify for the Opportunity Zone benefits:

1. Liquidate gains, make the election on your tax return, and roll the proceeds into an Opportunity Fund (which will purchase a property in an Opportunity Zone tract) within 180 days of your taxable event.

2. After closing the OZ asset, the fund has 30 months to invest a significant amount of capital towards improving the OZ asset (the investment must equal the value of the real estate, excluding the land, at acquisition).

3. The Opportunity Zone asset must be held for 10 full years to realize full OZ benefits.

4. To maximize tax benefits, the Opportunity Zone property must be purchased by the end of this year.

The time for those interested in acting on Opportunity Zones is now as the window to realize maximum benefits is still open. That said, as real estate advisors we are very wary of this program, and we will explore that further in a second writing.  In the meantime, if you have questions on the matter we are happy to offer our input or steer you to professionals who know more than we do. Contact us at 303-962-9564 or  Hornstein.Fetter@Pinnaclerea.com.