Opportunity Zones - Great Investing Trend?

[PJ Kolnik]

Investors,

I was reading about these new Opportunity Zones that are being established as part of the Tax Cut and Jobs Acts. I wanted to start a thread that starts the speculation of potential investment opporunity possible in these areas.

Also, can someone help me understand the benefit of the following statement in these zones? 

"Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on any prior gains until no later than Dec. 31, 2026, so long as the gain is reinvested in a qualified Opportunity Fund, an investment vehicle organized to make investments in these areas. In addition, if the investor holds the investment in the Opportunity Fund for at least 10 years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold, according to Treasury officials."

http://www.housingfinance.com/news/treasury-names-...

https://www.curbed.com/2018/4/12/17227124/investme...

[Robb Crocker]

I've been doing a TON of research on this.  I think two of them most important items to keep in mind are: 

1. From everything I've read, and from the "experts" I've talked with, you can only invest CAPITAL GAINS from other investments to get the tax benefits of the Opportunity Zone investment.  You can't invest "earned income" or "borrowed money."  It has to be money that you recieved as a result of a capital gain from the sale of an asset like stocks, real estate, art, etc...  (Not sure, but it seems like crypto currency gains might qualify too.)  

2. If you are purchasing an existing piece of property, you must invest as much in the rehab/upgrade of the property as you did to initially acquire it.  For instance, if you buy a $100,000 rental and put down $30K to buy it (and use $70K of bank financing), you must spend at least $30K in improvements.  To earlier comments on this thread....the IRS still has to determine what will and won't qualify as "expenses" on the improvements....but it's safe to assume most of the expenses you would normally pay for on a standard rehab would qualify.

From my perspective, this program is MOST beneficial to folks who have large capital gains in assets OTHER than real estate .....as RE investors like us can currently use the 1031 exchange to defer taxes for decades....while still securing access to capital through the leverage and financing of those assets.  

That said, if you are willing to pay a REDUCED capital gains bill by selling some of your real estate, you could potentially have a MASSIVE, tax-free capital gain at the end of 10 years, if you are able to invest in the right asset in the next "up and coming" area.

My focus is small commercial buildings. This program lines up perfectly with what I've already been doing for the past 13 years...which is buying under-utilized property in areas of future progress.  I've told some of my friends and business associates that for those who understand how to utilize this program, it can literally be a LIFE CHANGING opportunity to build personal and family wealth.  We've got 7.5 years to take advantage of it....which sounds like a lot of time....but will be here and gone a lot quicker than most of us probably realize.

I look forward to hearing more about what the BP community does to take advantage!