To encourage investment in areas designated by legislation as economically distressed, the opportunity zones fund provision was created in the 2017 Tax Cuts & Jobs Act. Real estate developers who invest in these areas following specific guidelines can receive substantial tax benefits. Additionally, individuals or businesses who invest in Opportunity Zone Funds for the required length of time can enjoy substantial tax savings.
In Arizona alone, 169 tracts are designated as opportunity zones, 84 in Maricopa County and 28 in Pima County. In and around Phoenix, opportunity zones include parts of Old Town Scottsdale, downtown Phoenix, Paradise Valley Mall, and downtown Mesa. Parts of Tucson’s downtown and the Northwest side located east of I-10 along Thornydale from Orange Grove to Ina are included as well. Are you looking for a way to defer capital gain taxes by investing in your community? Are you a real estate developer interested in setting up a Qualified Opportunity Zone Fund?
Three Opportunity Zone Fund (OZF) Investment Benefits
- Temporary gain deferral: Any capital gain that is invested in an OZF within 180 days receives a tax deferral. This could be a deferral of any capital gain, including gain from the sale of stock, real estate, operating business, personal assets, etc. The gain may be deferred until the date on which the investment is disposed of or December 31, 2026, whichever is earlier.
- Permanent exclusion: If the investment is held for five years, taxpayers can permanently exclude 10% of the original deferred capital gain, and the exclusion amount jumps to 15% if held for seven years. Be aware that these exclusions only apply if the required holding period is met by December 31, 2026.
- Appreciation Forgiveness: The most appealing benefit for OZF investors is that the tax owed on any OZF investment appreciation is forgiven if held for at least ten years. Since many real estate developers find it is not feasible to satisfy the 10-year hold to maximize the benefits, given the typical life span of their investments and the unpredictability of the economy, some deals are structured to permit sponsors to exit while allowing investors to remain and benefit from the tax incentives.
Creating a qualified opportunity zone investment fund can offer substantial tax savings, but the laws and regulations are complex and constantly changing. This is why working with a team that has successfully created funds for others – and navigated around the small details that can completely derail a project – is vital to the process. Our professionals can partner with developers to properly structure the fund, ensure it continues to meet qualifications, and keep you apprised of critical dates where decisions must be made.