Opportunity Zones - new potential PERMANENT tax savings?

[Austin Hendrickson]

Hi Everyone,

As a CPA who specializes in real estate I have been doing some reading on the new Opportunity Zones (OZ) passed effective 1/1/18 with the new tax law. While guidance is still a bit unclear and more research has to be done I think this is a huge opportunity for real estate investors to have permanent tax savings (along with other benefits) - even better than a 1031 exchange!

From what I understand here are some key benefits of the Opportunity Zones:

 - Permanent gain exclusion on the appreciation of investments in Opportunity Zones 

- Deferral and reduction of capital gains used to invest in Opportunity Zones. I believe this is deferred until the investment is sold or 12/31/2026, whichever comes first. (this is the capital gain used to fund a deal in an OZ, not the appreciation on the investment). There are additional rules for holding it less than 5 years (100% deferred gain recognition), 5-7 years (90% deferred gain recognition), and > 7 years (85% deferred gain recognition).

- Any depreciation taken on the investment in the OZ is permanently saved and NOT recaptured if held for 10+ years. This is big and combined with the gain exclusion is essentially a double dip of tax savings!

Other items to consider:

- Income or loss from operations in an OZ is taxed normally

- An OZ is a lower income census tract designated by each states Governor. The zones have already been established. I have looked into the zones around the Twin Cities (Minneapolis & St. Paul) and Minnesota as that is where I live. If other investors have looked into zones in their local areas, feel free to chime in.

- I believe eligible investments in OZ's are real property, operating businesses and equipment. 

-However note that for real property the original use must be with the taxpayer or it must be substantially improved i.e. new construction or a major renovation - it does not look like turn key properties would qualify. The point of the law is to improve certain areas of the country by bringing in new structures and upgrades.

I will be doing more research and talking to additional real estate specialists at our firm for more guidance. Again this is just my best understanding of the current law, there is still a lot more guidance needed for OZ investments.  If anyone has additional info or guidance or sees something in this post that is incorrect please share!

Overall this could be a HUGE benefit for real estate investors and definitely something to consider. The potential for permanent depreciation savings, appreciation savings and reduction of capital gains could be very significant.

I can also run through a hypothetical example if it would be helpful.

[Paul Caputo]

This is an extremely interesting new wrinkle in the tax code. The forthcoming guidance on this will be very helpful, and by first glance it looks like a huge benefit for savvy investors. Using cost segregation and 100% bonus depreciation in tandem with the OZ seems like a no brainer, but the opportunity for using cost seg’s “little brother” an abandonment study would be perfect for this. An Abandonment study is basically the same as a cost segregation study, but it’s done on a property that will be torn down. You get all the benefits you’d normally get from cost seg, but there’s no recapture since the assets are immediately retired through demolition. Then you build the new property and do cost seg on the new assets as you’d normally do. Done right it’d be a windfall tax benefit and you’re doing your part to revitalize the area! The more I learn about the new tax law, the better it gets for real estate investors.