Opportunity Funds May Bolster Real Estate Investment Gains
- Posted: February 25, 2019
- Posted by: Travis Lynk
- Last Reviewed: February 27, 2019
The new Opportunity Zone program created by the 2017 Tax Cuts and Jobs Act is generating a lot of interest with investors with taxable capital gains. The program incentivizes taxpayers to reinvest those gains in Qualified Opportunity Funds by allowing them to defer—and potentially significantly reduce—capital gains tax liability. In fact, long-term Qualified Opportunity Fund investments may qualify for zero capital gains tax liability after 10 years.
The Opportunity Zone tax incentive structure is particularly well suited to long-term real estate investments. With the program’s tax deferments, reductions, and exclusions, capital gains invested in a Qualified Opportunity Fund for 10 years could potentially double the return on investment compared to gains held in a traditional stock portfolio for the same amount of time with a similar annual rate of return.
Understanding Opportunity Fund Tax Advantages
Qualified Opportunity Funds are self-certifying entities created with the express purpose of attracting and investing private equity in Opportunity Zones. A Qualified Opportunity Fund must commit at least 90% of its assets to one or more of the 8,700 designated Opportunity Zones in the United States and its territories.
Qualified Opportunity Funds can take partnership interest in, or stock ownership of, businesses operating primarily within an Opportunity Zone, or Qualified Opportunity Funds may invest in real estate within one or more Opportunity Zones.
Taxpayers who invest untaxed capital gains in a Qualified Opportunity Fund can defer capital gains tax payments until December 2026, or whenever the Opportunity Fund investment is sold. Additionally, investments held for five years are eligible for a 10% reduction in capital gains liability, with an additional 5% reduction—for a total of 15%—after seven years.
Long-term investors who hold Qualified Opportunity Fund investments for 10 years or more will owe no capital gains tax on any appreciation of those investments.
Real Estate Investments and Opportunity Funds
Real estate is a naturally compatible asset class for long-term investors. Because Qualified Opportunity Funds acquire real estate in developing Opportunity Zone neighborhoods, the potential for rapid appreciation in property values is significant.
This is already occurring in Opportunity Zones contiguous to or within popular districts in major metropolitan areas where available property for development is limited. Opportunity Zones in neighborhoods in and around Los Angeles, for example, are projected to see a double-digit rise in property values in 2019.
The anticipated appreciation in real estate prices, coupled with generous tax incentives, can generate impressive returns for long-term investors. Because these capital gains may qualify for a permanent tax exclusion after 10 years, real estate-oriented Opportunity Funds are an attractive alternative for some investors.
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