Seeking more info on opportunity zone investing

[Angela C.]

Does anyone here have any experience using cap gains for opportunity zone investments instead of the traditional 1031 like-kind exchanges?

[Chris Montgomery]

There are pros and cons to choosing an OZ over a 1031.  If you decide to do an oz investment on your own I'd definitely recommend using an experienced attorney, as the compliance for OZ regs can be somewhat complicated.  I'll give you the high level below:

One of the pros is the one you mentioned - you only have to invest the cap gains, not the entire proceeds.  You can generally invest into any type of real estate or business as long as it's located in an oz.  There is an excluded list of 'sin businesses' that you have to avoid.   A few more considerations:

- Unlike 1031s there is a substantial improvement requirement.  You have to invest 1x the purchase price (excluding the land) into the real estate you purchase.  So you can't simply buy a cash flowing property but instead will need to do significant improvement or new development.

- You also can't invest into a triple-net leased property.

- You need to keep your investment in your fund for at least 10 years in order to avoid capital gains tax at the exit.  If you do, you'll also avoid depreciation recapture, which is a significant benefit.

- An OZ fund has to be a partnership or corporation - can't be a single member llc

- The deferal on the taxes on your current gain are only deferred until 2026.  It's a nice deferral but will be paid at whatever the tax rate is in 2026.  There is proposed legislation to extend this date but it has not passed yet.

- If you are investing in a business there are several tests to pass to ensure that at least 50% of your business is in an oz - tests based on revenue, employees, etc.

There are more considerations as well and the devil is in the detail.  We're closing our 5th fund so I'm obviously a big believer in the benefit of OZs but you want to do meaningful research before setting up your own fund.   It's easy to set up a fund but more difficult to stay compliant.  There are quite a few timing considerations about when to invest into the fund and how quickly the fund must deploy capital.

I hope that helps.